Tesco's 2014 Accounting Fraud and AIS Control Failures

Introduction

The Accounting Information System (AIS) plays a central role in the business computing structure of any organization. AIS encompasses the classification, collection, storage, monitoring, and conversion of a company's data into information used for internal control and reporting (Smith, 2016). Once an organization adopts an AIS, it can keep accurate records and manage its assets properly. Management utilizes AIS to ensure that suitable access controls and separation-of-duty requirements are in place. With such restrictions, administration can hold employees accountable for their interactions with the system. This paper examines how the components and functions of Tesco's accounting information system contributed to the 2014 fraud scandal.

Tesco's Fraud Scandal

Tesco is a popular grocery retailer headquartered in Welwyn Garden City, Hertfordshire, U.K. (Colson, 2017). Globally, it ranks ninth in revenues and third in profits. It is the leading grocery store in the U.K. and operates outlets in 12 nations across Europe and Asia. In 2017, Tesco's store portfolio included Tesco Extra, Superstores, Express, Metro, One Stop, online stores, and petrol stations (Colson, 2017). With growth among budget rivals and reduced non-food spending by consumers, Tesco appeared to have lost appeal to some of its customers. The company's shares lost 49 percent of their value as it continued to struggle in the competitive market against rivals Lidl and Aldi (Colson, 2017).

Eight Tesco executives were suspended in October 2014 following fraud allegations after it was discovered that the company had inflated its profits by £250 million (Colson, 2017). Consequently, the company's stock market value fell by £2.2 billion (Colson, 2017). Among those suspended were Chris Bush, Managing Director for the United Kingdom, and Kevin Grace, former Commercial Director. Following an investigation by the accountancy firm Deloitte, the profit overstatement was revised upward to £263 million (Colson, 2017). It was also determined that Tesco had withheld payments to suppliers in order to enhance its apparent sales performance and thereby inflate its profit figure. The company reportedly encouraged suppliers to make payments in exchange for better shelf placement or a competitive advantage over their rivals (Colson, 2017). Furthermore, in the days preceding the presentation of company results, Tesco encouraged buyers to ask suppliers to agree to payment deferrals so that the recorded sales figures would appear more favorable.

A criminal investigation was launched in October 2014, as confirmed by the Serious Fraud Office (Colson, 2017). In the aftermath of the scandal, investors sued the company, claiming they had lost significant sums after purchasing shares on the basis of misleading financial accounts. Following the scandal, the company lost nearly half of its market value. John Scouler, Christopher Bush, and Carl Rogberg — former Commercial Director for Food, Managing Director, and Finance Director, respectively — were accused of financial fraud in their professional capacities, which was also considered an abuse of office (Colson, 2017).

Failure of the Company's AIS to Prevent the Fraud

The company's management failed to maintain a system of internal controls capable of ensuring reliable and accurate financial reporting. Ideally, once financial transactions are recorded, they must be scrutinized for precision (Young, 2013). Cash receipts, cash disbursements, and job cost reports must all be reviewed to verify the accuracy of the figures that the documentation provides. If incorrect figures are entered into the AIS, account reconciliation should be performed to detect errors in the financial transactions.

While financial transactions may satisfy the accounting requirements of validity, precision, and timeliness, some companies — like Tesco — engage in fraud deliberately to sustain the appearance of economic health. Although AIS software is computerized, which ordinarily makes manipulation difficult, such companies find ways to alter the system (Wells, 2017). Tesco likely used special accounts to conceal transactions or created separate entities to hide debts, particularly given the company's failure to pay suppliers. The specific internal control failures at Tesco included the following.

Segregation of Duties

The company had a limited number of employees working in the accounting department, which led to the consolidation of vital duties among only a few individuals (Wells, 2017). Management failed to segregate duties properly and did not appoint an independent person from outside the accounting department to review reports without bias or to maintain a strong control system.

Balance Account and Balance Sheet Reconciliations

Tesco failed to reconcile its balance accounts and balance sheets accurately. Under intense pressure to sustain strong financial performance, the company bypassed thorough auditing, knowing that its manipulated figures would not survive scrutiny from rigorous auditors. Tesco did not execute its financial reporting in accordance with established accounting principles governing valuation, measurement, obligation, occurrence, existence, and completeness.

Supervisory Controls and Governance

During proceedings, one executive stated that the financial misrepresentation had persisted for years because Tesco was focused on concealing a growing accounting gap in the short term, even while being aware of the potential long-term consequences. The company created separate entities to hide its debts, and without adequate governance and supervisory controls, the practice continued for several years.

Accounting Information Systems

Tesco willfully manipulated its AIS to facilitate accounting fraud. The accounting team was tasked with concealing material information to give the appearance of profitability even when the company was not performing (Wells, 2017). Team members falsified figures in ways they knew to be contrary to proper accounting principles and standards. It is reasonable to conclude that Tesco's computer audit trail failed, as there is no other satisfactory explanation for how such significant transaction misrepresentations went undetected.

References

Colson, T. (2017, October 4). 'The whistle is about to blow': Secret report exposed Tesco's £250 million accounting scandal, court hears. Business Insider.

Smith, J. S. (2016). Accounting information systems: Ethics, fraudulent behavior, and preventative measures. University Honors Program Theses, 178.

Wells, J. T. (2017). Corporate fraud handbook: Prevention and detection. John Wiley & Sons.

Young, M. R. (2013). Financial fraud prevention and detection: Governance and effective practices. John Wiley & Sons.