Research Background

Research background

Tesco is the supermarket giant in the UK which has conducted accounting scandals. In this way, it has admitted six-month profit at the end of 23^rd August 2014 by overstating estimate amount of £250 million. It is analyzed that shares of Tesco are declined over 11 years and destroy approximately £2 billion from Tesco’s worth. Further, four top managers were suspended in which managing director of UK was also involved. This investigation has been ongoing on since last four years by Tesco. Another fraud was a misstatement of financial records that was conducted by most recognized company i.e. Tesco hence it has a negative impact on the investors. This issue has conducted due to different reason such as misstatement of financial reporting practices, corporate governance, auditing standards, and internal controls (Duell, 2017).

This research is beneficial for readers to gain their understanding regarding the impact of accounting scandals on organizational performance. It is also significant for Tesco companies to understand the method of detecting fraud and also effective to comprehend the remedial measures being taken by TESCO. This research is also beneficial for retailers to gain depth understanding regarding different strategy to overcome the accounting scandals in future (Business Insider, 2017).

The main purpose of this research is to analyze the impact of accounting scandals on organizational performance: In the context of Tesco, UK. Following objectives are used to attain the main aim of this research:

• To explore the meaning and concept of accounting scandals
• To address the method of detecting fraud: in context of Tesco, UK
• To identify the remedial Measures being taken by TESCO
• Recommend the strategy to overcome the accounting scandals in future: In context of Tesco, UK

• What are the meaning and concept of accounting scandals?
• Which methods can detect the fraud: in context of Tesco, UK?
• What are remedial measures being taken by TESCO?
• What are the strategies to overcome the accounting scandals in future: In the context of Tesco, UK?

To explore the meaning and concept of accounting scandals

According to BBC (2017), accounting scandals are arising due to intentional manipulation in financial records. It also created due to disclosure of financial misdeeds through trusted managers of government and corporation. These misrepresentations entail the complicated technique to misdirect and misuse funds, understating expenses, overstating revenues and worth of company asset and underreporting the presence of liabilities. These scandals can be conducted by the employees and company for misleading the investors and shareholders. This kind of creative accounting can generate a high amount of fraud hence assessment should be conducted by government oversight society like security and exchange commission in the UK. Employees who conducted accounting fraud at the desire of their workforces may come under the prosecution of the personal criminal.

To address the method of detecting fraud in Tesco

In opposed to this, Hope (2016) stated that a whistle-blower through the legal department is detected by new CEO, Dave Lewis. In such case, the company has estimated its first-half profit and announced on August 29. It has also overstated by £246 million. The whistleblower was a member of the finance department. It is concerned that his department was not getting the full credential associated with commercial revenue. The chairman and CEO have appointed by a general counsel of Tesco on the situation. It is analyzed that Tesco had announced the overstatement of revenues on September 22, 2014. According to the audited financial statement of Tesco for the year of 2014-15, the sum of overstatement regarding profit before tax for the year 2015 was £53 million and total overstatement of the previous years was £155 million.

Rationale of this Study

To identify the remedial measures being taken by TESCO

Independent (2017) opined that major structural transformations have been started in Tesco. These are new management team, an overhaul of management structure, moving out from non-core business, reduction in capital spending, a new code of business conduct, and higher emphasize on cost price as compared to commercial income. In this way, corporate training initiative plan can help employees to conduct ethics and compliance at the workplace. Further, commercial liaison with the suppliers and incentive framework is reset by a commercial team of Tesco. Along with this, audited financial statement of Tesco for the year 2014-15 is enhanced and more visible disclosure of its bookkeeping of viable revenue. The company is also focused on adequate accounting of commercial revenues.

In support to this, The Guardian (2017) stated that external audit of Tesco has been passed to tender after 32 years along with PwC has equally agreed that they will not engage in the tender. Tesco also announces new auditors such as Deloitte to make proper auditing. Tesco is also giving their time and resources to comprehend, assess, and avoid the weaknesses. Along with this, understandable control improvement plans is also focused by Tesco. The final price of these scandals is paid by the community at large level. These scandals have also affected the stakeholders who have invested their earned savings in Tesco as per their trust on them. It can be stated that each people who were part of the system have right to bypass the control system hence people were also liable for whatever controls and accounting and reporting standard is set. These people can prevent the frauds of Tesco.

Recommend the strategy to overcome the accounting scandals in future: In context of Tesco, UK

Gerstein et al (2016) recommended that enterprise risk assessment strategy can be used by the company to overcome the accounting scandals in future. In this way, the company should appoint effective audit committees to assess the key enterprise risks. Enterprise risk not only impacts on the financial record of the company but also delay to make it. Therefore, the company should hire the audit committee and external auditors for audit planning. It is also analyzed that enterprise risks are vibrant such as five year ago; Tesco was faced high competition due to hard discounters. Hence, these kinds of risk should be frequently reviewed.

On the other hand, Anderson (2014) evaluated that company should use sound accounting and internal controls to overcome the accounting scandals in the future. In a different corporation, the worth is observed by shareholders through the business model. Since, the business model shows the position of the company in the marketplace. This model also demonstrates the profitability of company which is the main factor of estimating the share price. But, on the same topic, Tesco case shows the impact that not having sound accounting practices and shows the internal controls that have declined the business worth in the market. Therefore, Tesco should make changes in its financial accounting practices and report like more instinctive, fewer complexities, more comprehend GAAP along with it should be comprehensibly inferred and constantly applied (Tesco, P. L. C., 2014). Moreover, a strict code of conduct and whistleblowing practices should be placed within Tesco. In this way, a senior member of accounting department can raise their issue to legal counsel as compared to directly contact with audit committees, CFO and CEO. Thus, it can be stated that whistle-blowing practices could be effective to detect the accounting errors in less time.

Purpose and Objectives of the Topic

In support to this, the Telegraph (2017) recommended that employee’s incentives policies could be effective to overcome the accounting scandals in the future. There are certain factors that may lead to accounting fraudulent activities such as to increase the worth of performance as per their compensation, particularly, the option value, dynamic compensation recognition, and bonuses for senior management, CEO, and CFO. It creates complexities to organize earnings, set unrealistic income, target profit and manipulate accounting statement to meet the objectives and market expectations. Hence, incentives should be linked to balance scorecard along with zero acceptance of destructive accounting action to attain a financial outcome.  

The Fraud Triangle Model

According to Gayle and Crossley (2014), the fraud triangle is a model which explains the different factor that can cause to a person to conduct the fraudulent activities in an accounting. It involves three elements which together encourage to fraudulent act named incentives, opportunities, and attitudes. In this case, it can be evaluated that a common incentive plan for companies makes manipulation in financial statement and also declines the financial prospect of company. It can also manipulate it’s earning to meet the benchmark and analyst forecasts like previous year earnings, to attain debt agreement restriction, to accomplish an additional benefit target on earnings, and to unnaturally go up the stock prices. Due to misappropriation of the asset, financial pressure could be a common incentive for their employees. Further, workforces who have a financial obligation, gambling issue, and drug abuse may steal to attain their personal needs.

In support to this, Chesney et al (2017) stated that financial statement of all corporations is the key issue of manipulation. Hence, it can be stated that the uncertainties could be greater for those companies in which accounting estimation are highly entailed. Furthermore, turnover in accounting employees, deficiencies in information and accounting procedure can generate an opportunity for the misstatement. Due to misappropriation of assets, opportunities are higher in corporations with available cash, inventory and valuable assets, particularly if the assets are the small quantity and can be easily detached. Moreover, insufficient control over payments to sellers and payroll systems can facilitate workforces to generate pretended sellers and also facilitates them to make a fake statement in terms of service and time.

As per the view of Mail online (2017), the attitude of senior executives with respect to financial reporting is a key risk factor to assess the potentialities of the fraudulent financial statement. It is analyzed that if CEO and other senior manager show disregard in terms of financial reporting procedure like constantly issuing extremely positive forecasts then it will impact on the organizational performance. Along with this, they are highly concerned regarding fraudulent financial reporting, and wrong estimation of earnings. Along with this, misappropriation of assets can be raised in case of management cheats to customers via over pricing for goods and involving in tactics of high-pressure sales. In this way, employees may recognize that it is acknowledged for them to act in the identical approach.   

The Fraud Triangle Model

In the view of Kukreja and Gupta (2016), “Don’t be evil” is the motto of Google that is developed to make the ethical code of practices within an organization. It is introduced in 2000. Earlier, Google has “Do the right thing” motto in terms of working as per the corporate code of conduct. The actual motto was retained in the Google. In this way, it can be stated that Tesco should use this motto to prevent the accounting scandals at the next level. In this way, the company should focus on the operating financial measure, Generally Accepted Accounting Principles and corporate values.  

Research methodology is a procedure which is implemented for pooling facts and figures with the intention of completing research in methodological and well-organized manner. Moreover, research methodology is a theoretical and logical assessment of different technologies that are particularly applied in a research field. This chapter entails a concise argument regarding research approach, philosophy, strategy, purpose, and data gathering technique. These components support to the researcher to pool required facts and figures to solve the research concern and attaining the research objectives. This chapter also entails a choice of appropriate research technique and strategy with suitable validation (Berg and Moré, 2016).

Research philosophy

Research philosophy is a significant factor to assess the achievement of any specific research while adding value in the part of knowledge. Further, research philosophy is beneficial to build comprehension and knowledge regarding research concern and distinctiveness of research. Research philosophy can be categorized into different parts named positivism, interpretivism, and realism. These differ from each other in a different manner in terms of nature and scope.

The researcher is used interpretivism research philosophy as compared to positivism and realism philosophy due to its subjective base and usefulness in pooling beliefs and outlooks of research respondents regarding the impact of accounting scandals on organizational performance in the context of Tesco, Uk. Along with this, it allows a researcher to use small sample size for pooling facts and figures regarding research issue that is not be done through positivism and realism research philosophy. In opposed to this, positivism philosophy is not chosen by a researcher due to no need of gathering statistical information and scientific information regarding predetermined research issue (Abernethy, et. al., 2017). Besides this, realism research philosophy emphasizes on the authenticity that survives in the society and hence it is not appropriate for this research study.  

Research Approach

Research approach can be defined as a methodology which is implemented by a researcher to discuss the research behind the selection of specific processes and strategies. Research approach can be categorized into two parts named inductive and deductive approach.

Research is used the inductive approach as compared to deductive approach because it aids a researcher to develop effective utilization of qualitative information and for conduction depth assessment of research concern. This approach is allowed a researcher to pool a large amount of facts and figures associated with the impact of accounting scandals on organizational performance in the context of Tesco, Uk (Sughra and Crowther, 2015). It also allows a researcher to assess the relationship between accounting scandals and organizational performance. It is also analyzed that deductive approach emphasizes on pooling quantitative facts and figures which makes it inappropriate for this research.

Literature Review

Research design

The researcher is implemented mix research design to attain the research aim and objectives because this design incorporates the distinctiveness of both research designs. In such manner, quantitative research design is implemented to measures the sales and share price performance (Samkin, et. al., 2016). At the same time, qualitative research design is implemented to obtain theoretical data about the impact of accounting scandals on organizational performance in the context of Tesco supermarket, UK.

Research Purpose

Research purpose allows a researcher to build as well as improve their comprehension and concept associated with a research problem. The researcher purpose can be classified into different parts such as exploratory, explanatory and descriptive research.  These are used by a researcher as per the nature of research issue. The researcher is used exploratory research design as it allows them to assess the answer regarding how and why accounting scandals have an impact on the organizational performance (King and Fitzgerald, 2016). In opposed to this, explanatory research is not used by a researcher because it relies on the earlier experience instead current experience.

Data Collection Method

The researcher is also used secondary data pooling technique as it will allow a researcher to eliminate the problem between expected and current required data. In such manner, secondary facts and figures are pooled via secondary sources such as annual report, journal article, newspaper, offline and offline sites, authentic websites, and academic books. This information is also effective for getting the accurate and reliable outcome in the context of research subject matter (Awolowo, 2016).

Sampling

The researcher is also used a non-probability sampling technique to conduct the qualitative research. Under this, it is used convenience sampling method where the researcher has selected the sources as per their convenience. It would be beneficial to pool the data in less time with minimum efforts. For obtaining the secondary data, the researcher is selected 3 articles regarding research issue from the different newspaper (Mason and Evans, 2015).

Data analysis

After pooling facts and figures, the researcher has used statistical as well as content analysis. In this way, statistical data is used to comprehend the information through different charts and graphs. Along with this, content analysis is used to link the gathered articles from literature review as it enhances the reliability and validity of research (Andergassen, 2015).

Ethical consideration

The research is also followed the data security act 1988 where they have no authority to release the personal data to anyone during and after completing the research. The researcher has not manipulated any data which is gathered from a different newspaper. In addition to this, the researcher has gathered the secondary data from authentic sources to enhance the reliability of research (Gerstein, and Friedman, 2016).

Article 1: Tesco faces UK legal action over accounting scandal

Figure 1:  Sales performance of Tesco

 

(Sources: Independent, 2017).

Figure 2: Stock price of Tesco

 

(Sources: Business Insider, 2017)

The above diagram depicts that sales of Tesco are declined in 2014 as compared to previous years due to declining value of the company in the market. From the article, it is analyzed that Tesco is facing a legal action by a set of shareholders who have claimed to have mislaid £150m due to accounting misdeed scandals of a supermarket in 2014. Further, the Serious Fraud Office (SFO) has charged three previous Tesco executives for conducting fraud and false accounting. The SFO has started the inquiry of Tesco supermarket after the announcement of overstated profit by £263m in October 2014. After that, the figure was changed upwards to £326m while Tesco has involved to earlier accounts. Auditors evaluated that the overstated profit data was the outcome of Tesco booking compensation from suppliers earlier the corporation had been due to the capital. These scandals had damaged the share price of the company which has declined approximately 20% since 2014.  

Method of detecting fraud in Tesco

This article is supported by the view of van Rinsum (2017) as it was evaluated that the behavior of senior executives with respect to financial reporting is a prime risk factor for evaluating the expectation of fraudulent financial report. It is assessed that in case CEO and senior management demonstrates their disregard in financial accounting process such as issuing high positive forecast then it will impact on organizational performance.  

Article 2: Tesco executives to face trial in 2017 after £326m accounting scandal

Figure 3: Share price of three retailers  

 

(Sources: The Guardian, 2017).

Figure 4: Stock performance of Tesco

 

(Sources: Financial Times, 2017).

Figure 5: Profit performance of Tesco

 

(Sources: BBC, 2017).

From the above chart, it can be stated that Tesco ends the day as the greatest faller in the FTSE 100, losing 5.2pc to close at 222.7p. Along with this, Morrison declines 4.1pc to 190.4p, and Sainsbury declines 3.7 pc to 263p. These are the largest losers today in the retail industry.

Further, from the article, it is found out that trio can face 10 years in jail in case auditor observes guilty of the fraud accusation and seven years for artificial accounting. It is also evaluated that three previous executives of Tesco will create trial in September upcoming period with respect to £326m accounting scandals in the biggest supermarket of Britain. Along with this, the trio supposedly unable to correct mistakenly overstated revenue data for the supermarket that were published to Tesco employees, auditors, and the wider market.  This finding is also favored by the view of Shil (2014), as it was discussed that structural changes have been initiated by Tesco. These changes are an overhaul of management structure, new management team, shifting towards non-core business, deduction in capital spending highly focuses on the costing price rather than commercial revenues. In such manner, corporate training plan can aid workforce to obtain ethical and compliance practices within an organization.

Article 3: Tesco to pay £129m fine over accounting scandal

Figure 6: Tesco’s uptick in its performance in the UK 

 

(Sources: The Telegraph, 2017).  

Figure 7: Changes in share price after accounting scandals 

 

(Sources: Mail online, 2017).

The above charts depict the sales and share price of Tesco is declining due to accounting scandals. From the assessment of the article, it can be stated that supermarket arrives at deferred prosecution agreement with Serious Fraud Office and can compensate investors £85m in return. It is also evaluated that Tesco is shell out £235m for settlement with the SFO and financial conduct power in 2014 accounting scandals that shocked the retailers in Britain. It will shell out £129m for paying fine to DPA and SFO but, there is need to make court approval. The DPA is associated with Tesco subsidiary Tesco Stores Ltd. The supermarket has separately made an agreement with FCA to compensate £85m to investors which are influenced by the trading statement and overstated profits on 29 August 2014. Tesco will shell out legal expenses related to an agreement and total exceptional alleged was expected around £235m. It is also analyzed that shareholders must have purchased Tesco shares between 29 August and19 September in 2014. For obtaining the compensation, investors must purchase more shares as compared to that period. Shareholders have confronted the financial losses. In this way, any losses can involuntarily balance by an equivocation agreement. Thus, each qualifying investors will get per share in 24.5p whereas compensation for investors may differ and relied on the made investment.  

Remedial Measures being taken by TESCO

 This finding is also favored by the view of Tse et al. (2016) as it was recommended that incentive policies of workforces can be beneficial to avoid the accounting scandals in the upcoming period. There are some factors which may lead to fraudulent practices like improving organizational values as per their compensation, especially dynamic compensation recognition, option values, CEO, CFO and bonuses for senior management. It generates complexities for managing to earn, target profit and manipulated accounting records. As a result, the incentive should be associated with a balanced scorecard and zero acknowledgments regarding destructive accounting plan to meet financial result.

Conclusion 

From the above interpretation, it can be concluded that avoiding financial misstatement fraud is like preventing offense. There are different factors which were liable for conducting accounting scandals. However, financial fraud could be minimized and its impact can be declined by control and balances instead detecting and preventing it. There is evidence that all financial fraud is initiated smartly and then it grows larger until they cause harm to shareholders and other key stakeholders. It can be summarized that experience and adequate internal controls are preventative measures to make an assessment of different fraud activities as compared to auditing. It can be concluded that natural causes of accounting scandals show the gaps in negligence with auditors and internal controls. The ultimate effect of these scandals is faced by society at a high level especially stockholders, who put their large amount of earned savings in these corporations by building faith on them. But, it can be stated that if people are part of the system then they have right to control the set reporting and accounting standard. As a result, it would be beneficial to prevent the fraud of Tesco at next level. 

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