Why Tesco’s accounting process matters in Asia

Brian MooreThere is gradual realisation that the £250-million (US$401-million) profit-overstatement is the tip of an iceberg nightmare for Tesco. With this realisation, it would appear that all advance-booking of supplier investment will be challenged in terms of the degree of judgement involved and the resulting scope for interpretation.

Whilst superficially this looks like a Tesco UK problem, there are major implications for retailers everywhere, including Asia.

In fact, as the balance of supplier-retailer power in Asia swings in favour of major retail players, retailers’ Commercial Income – that is, trade investment by suppliers – will become an increasingly important source of their profits.

Asian retailers who learn from how this Tesco crisis plays out over the coming months, and take precautions now, will minimise the inevitable fallout at local level.

Most retailers’ auditors are aware of the complexity involved in auditing retailer accounts, mainly arising from the fact that retailing is based on high-volume, low-value transactions. This means that auditors tend to focus on the systems, controls and processes, where a high degree of commercial judgement and interpretation comes into play.

The real issue for Tesco is the impact and distraction that will be caused by an independent audit of process conducted under a City spotlight “with lawyers present”, in troubled times.

In other words, accounting procedure that was fine in good times could now be re-assessed from a different perspective, and with the benefit of hindsight.

Review of Tesco’s Commercial Income

The retrospective analysis of all commercial income, combined with the presence of Tesco’s lawyers, coupled with potential shareholder class-action moves in the US, has to result in increasing clarification, definition and classification of all monies paid by suppliers to retailers including:

  • Rental of space
  • Price support
  • Promotion support
  • Over-riders
  • Percentage split between commercial income and operating profit/sales

And more… think shopper-marketing, for starters.

As the ‘revelations’ enter the public domain, other major retailers will need to explain how their systems and process are different or better, or suffer hits to their share prices. In the same way, brand owners will need to anticipate and defend their use of trade investment to ‘encourage’ consumer demand.

The opportunity window

The real opportunity for Asian retailers and suppliers lies in the fact that a move to results-based reward, paid retrospectively, would solve many of the problems caused by advance booking of commercial income.

Measurement against clear and unambiguous KPIs would reduce the judgement-element, and booking of the income could be tied down to actual sales performance in given periods of the financial year, or a conservative estimate agreed and used where necessary.

The resulting issue for retailers would be the negative impact on cashflow of moving from payment-in-advance to after-the-event remuneration.

Bear in mind that credit periods were always intended to bridge the gap between supply of goods to the retailer and receipt of payment from the shopper.

However, with average credit periods in the UK at 40 days-plus on supplies that can include best-selling SKUs being delivered daily, and an average stockturn in retail of 15 times per annum, that is 24 days stock, it could be said that there is already some surplus in the cashflow pipeline.

Deep down, the Tesco crisis is but another business problem that needs managing as it struggles to rebuild its shareholder value.

This setback will give Tesco and its supplier-partners a once-and-for-all opportunity of ‘cleaning up the future’, providing a basis for fair-share dealing where willing compliance saves the cost of second-guessing, a place where business development becomes the focus of business reviews, and appropriate reward for risk the basis for negotiation.

A true re-setting of the supplier-retailer clock could provide a useful head-start in avoiding this ‘pile of troubles’ for financially astute Asian retailers.

 

Tesco’s troubles piled high

  • Series of profit warnings leading to £250m profit over-statement in half-year accounts
  • CEO Philip Clarke replaced by outsider Dave Lewis from Unilever
  • Four key senior managers suspended, including the UK managing director
  • Boardroom purge underway and two new non-executive directors appointed
  • Government investigations: The UK’s Financial Conduct Authority has begun an investigation into the accounting scandal, while the Financial Reporting Council is considering launching its own probe.
  • Purchase of corporate jet: Tesco’s new chief executive Dave Lewis has moved to head off shareholder anger over its new £31.1 million Gulfstream G550 executive jet by ordering its sale and the sale of its four airplane fleet.

All this resulting in a 50% fall in Tesco’s share price, its lowest value in 11 years.

 
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