Bath time over for new Tesco chief

In the accounting world what chief executive Dave Lewis is doing at Tesco might be characterised as “taking a bath”.

He has cannily attempted to unearth all the bad news hidden in the supermarket’s accounts in one hit, to get them all over and done with. Deloitte found that the black hole in Tesco’s accounts amounted to £263m, with the practice of overstating profits going back three years.

Investors have seen their shares lose half their value this year with the accounting calamity coming on top of falling sales and market share in the grocery sector. The latest hammer blow saw chairman Sir Richard Broadbent announce he would be stepping down to join eight suspended executives on the sidelines. Taking a bath now rather than a year down the line means blame will not be apportioned to Mr Lewis and he can wash his hands of the old guard and start with a clean slate.

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Many investors will be hoping that Mr Lewis will now be able to pull the plug on his bath and deliver a strategy that will return the one-time giant of UK business on a path back to its former glories. Tesco’s share price hit an 11-year low last week and as it still has the biggest market share in the UK plus a now supposedly clean set of accounts, now might be the time to go in. After all, Warren Buffet still has a near 3 per cent stake in the company.

But there is no reason to think this is over; in fact it could still get worse as the Serious Fraud Office has confirmed it is carrying out a criminal investigation into the accounting irregularities, while the Financial Reporting Council could also step in, with the accountancy and audit watchdog having said it is “monitoring events at Tesco closely”. There could be serious fines and more to come from these investigations that could heap more misery onto the supermarket.

There is no indication that things are getting better and there is still no clear strategy on how to drag Tesco out of its malaise, with Mr Lewis not expected to announce anything until next year. There is a lot of rhetoric about the need for strategic renewal, but very little detail has been communicated by the company.

The public and investors rely on transparent and clear accounting for their investment decisions, and to find a FTSE 100’s books embroiled in such a scandal is very disappointing to say the least. And though this one issue was flagged up internally by a whistleblower, maybe there should be a comprehensive review of how Tesco has been treating other accounting line items.

There is scope in the current rules to pull forward rebates from suppliers that are classified as income, but that must be done together with a consistent policy over time. Deloitte has found that Tesco contradicted its own policy on this – it decided to start recognising these rebates much earlier than it had in the past. The industry recognises money before it is received – that is a common practice - but the problem is changing the policy halfway through. Recognising revenue before you actually receive it is fine if you know you are going to receive the money, but it is not fine when you book it at points when you would not normally. Such a change in policy would normally have to be approved by the auditors, but it is not clear whether PricewaterhouseCoopers was aware of Tesco’s shifting approach to this.