About ten years ago the BBC ran an excellent drama series about fictional east end villain Harry Starks. He specialised in defrauding suppliers by using a ‘Long Firm’ – a fraudulent variation on the ‘Baby shark’ system perfected by Leo Albrecht, founder of Aldi. Harry established a legitimate business, built up his credit then placed a large order with his suppliers before disappearing with the goods. Along the way the way he developed a nasty habit of using a red hot poker on his business rivals. It was great TV thanks to actor, Mark Strong.
It took the announcement of a £240 million ‘accounting discrepancy’ in Tesco’s accounts to open up this can of worms
Over the years a fair few contractors to Tesco have also been left feeling like Harry’s suppliers – are we going to get paid and when? They could see they were being turned-over but hardly any spoke out for fear of losing a supply contract to the UK’s biggest retailer. It took the announcement of a £240 million ‘accounting discrepancy’ in Tesco’s accounts to open up this can of worms twelve months or so ago. The government-appointed Groceries Code Adjudicator, Christine Tacon, has since published a damning sixty-page report cataloguing their treatment. It can be downloaded from www.gov.uk/government/publications/gca-investigation-into-tesco-plc
This rather basic breach of accounting standards was somehow overlooked by long-standing auditors PriceWaterhouseCoopers
The accounting scandal kicked-off when a whistleblower in Tesco finance revealed how their profits included so-called ‘commercial income’ from suppliers before it was received. This rather basic breach of accounting standards was somehow overlooked by long-standing auditors PriceWaterhouseCoopers and coincided with a crash in the share price and unexpected departure of Chief Executive Philip Clarke and Financial Director Laurie McIlwee. The Serious Fraud Office then opened an inquiry into what looked like share price manipulation and Christine started to ask what commercial income actually meant. Her report gives a startling insight into the terms imposed upon suppliers in return for putting their stock on Tesco shelves. They include:
- CODBA: The ’Cost of Doing Business Allowance’ i.e. a contribution to building new or refitting stores
- The ‘listing fee’ payable for establishing a new supplier account
- • An ‘eye level fee’ for positioning products on the prime ‘eye level/buy level’ shelf
- Discounts in return for paying the suppliers invoice on time
- A ‘new store opening’ contribution towards new Tesco outlets.
Of course everyone in retailing has known for years
Of course everyone in retailing has known for years this goes on so the report came as no surprise. Unfortunately though the steely-eyed Christine can’t do anything but name and shame the company and put the frighteners on others – a bit like Harry Starks. Without the poker though. The breaches of the GCA code of practice took place before it was given the power to fine anyone. However the Serious Fraud Office investigation is another matter. Executives in public companies who do that sort of thing are very naughty and can go to prison. Remember Gerald Ronson and Ernest Saunders who did porridge for boosting the Guinness share price to support a takeover bid for Distillers?
Tesco is now being pursued with so-called ‘class actions’
If the SFO does successfully prosecute executives that is not the end of the matter. Tesco is now being pursued with so-called ‘class actions’ from institutional investors who bought shares when their value was soaring and have seen their investment halved in value, post-scandal.
‘There is mounting public evidence that Tesco’s management were aware that the financial statements were untrue or misleading.’
Litigation finance group, Bentham Europe, seem to think they had the wool pulled over their eyes and are looking for blood – preferably that of Clarke and McIlwee as between the pair of them they allegedly trousered £2 million in bonuses after being suspended. Benthams specialise in large scale actions to recover shareholder losses and point out: ‘Investors have recourse under the Financial Services and Markets Act…following its misreporting of commercial income in 2014. There is mounting public evidence that Tesco’s management were aware that the financial statements were untrue or misleading.’ Auditors, PWC are also doubtless looking over their corporate shoulder and having interesting discussions with their professional indemnity insurers. Lots of lawyers are going to make lots of money out of this one.
The GCA does now have some teeth
The GCA does now have some teeth, but too late. I’d recommend Christine talks to a few quantity surveyors – the Gods of the building industry – to beef up the GCA code of practice. Building contracts usually oblige employers to pay the main contractor on fourteen days so a sharp QS sometimes slips in a ‘proof of payment’ clause to ensure subcontractors are not left dangling for ninety. A topic close to the heart of all small businesses.
Harry Starks was last seen sailing off into the sunset to begin a new life in Morocco, poker in hand. I wonder if he’d like a job at the GCA?