Analyzing The Impact Of Tesco's Accounting Scandal Essay.

Analyzing the Accounting Scandal of Tesco

Discuss About The Corporate And Environmental Responsibility.

Accounting or Accountancy refers to the process to measure, process and communicate the financial information of the business entities. For this reason, effective conduct of the accounting operations is considered as one of the major factors for organizational success (Scott 2015). At the time of conducting the audit operations, it is the responsibility of the business entities to comply with all the required accounting as well as financial regulations and principles so that the companies can avoid major accounting issues. Apart from the accounting standards and principles, business entities are also required to comply with the ethical standards of the audit profession (Kidwell et al. 2013). In this context, it needs to be mentioned that non-compliance with these accounting and ethical standards and principles can lead to major accounting scandals in the business organizations and these accounting scandals create major negative effects on the organizations, people related with the organizations and other stakeholders. In the recent years, there has been occurrence of major high profile accounting scandals all over the world. The accounting scandal of Tesco in the year 2014 was a major accounting scandal as it showed the ongoing loopholes in the accounting profession. These accounting scandals have large negative impact on the accounting profession as they downgrade this profession. The main aim of this report is to analyse and evaluate all the aspects related to the accounting scandal of Tesco. This report also takes an attempt to measure the consequences of this collapse along with the identification of the related parties affected by this scandal. After that, this report aims in relating two major accounting theories with this scandal. Lastly, this report focuses on deriving the major lessons learnt from this scandal of Tesco.          

In the year 2014, Tesco was involved in a major accounting fraud that contributed to a major accounting scandal at that time. In this case, three former executives of Tesco were accused for the inflation of profit by nearly £250 million (bbc.com 2018). The adoption of aggressive accounting practices can be held responsible as the main reason for the accounting scandal of Tesco. For this reason, the company was found to have overstated their profit by £263 million and the accounting authority had found this manipulation after identifying irregularities in the revenue recognition criteria of the company (businessinsider.com.au 2018). On a more specified note, it needs to be mentioned that Tesco did book the supplier contribution that were conditional to achieve the sales target. At that time, a few employees realized that it would not be possible for them to achieve the sales target. For this reason, they entered into deal with the suppliers to make early payments by offering them extra benefits in the next year and this whole process was kept in secret. In the worst case scenario, Tesco had to pay the money back to the suppliers (bbc.com 2018).

Consequences of the Scandal

In this context, it needs to be mentioned that Tesco itself had to face the major consequences of their adoption of illegal accounting policy by overstating profit. After the identification of this scandal, Tesco had to pay a fine of £235 million to the Serious Fraud Office and Financial Conduct Authority (ft.com 2018). Apart from this, the company was also required to pay a fine of £129 million as an apart of the deferred prosecution agreement with the SFO. Apart from this, this scandal created negative effect on their employees as many of the employees of the company did resign due to the conduct of illegal accounting activities. Apart from this, this accounting scandal of Tesco also had negative effect on the retain retail industry of United Kingdom (UK) (ft.com 2018).The accounting scandal of Tesco hit the growth of the UK retain industry as Tesco was one of the largest companies in the market. Apart from this, after the occurrence of the accounting scandal, there was a major fall in the share prices of Tesco that contributed towards less return of investment of the shareholders and the company had to pay late amount of compensation to the shareholders (theguardian.com 2018).

From the analysis of the accounting scandal of Tesco, it can be observed that there were major ethical issued involved in the whole case. While conducting the accounting operations, the accountants are required to comply with five major ethical principles; they are integrity, objectivity, professional competence and due care, confidentiality and professional behaviour (apesb.org.au 2018). However, in case of Tesco, the accused employees violated most of these ethical principles. The principle of objectivity demands the accountants to be straightforward and honest while providing professional services. As per the objectivity principle, the accountants should not compromise their professional judgement in the presence of bias, personal interest and conflict (apesb.org.au 2018). As per the principle of professional care and due care, it is required for the accountants to maintain their professional knowledge and skill set. According to the principle f professional behaviour, the accounting professionals are required to comply with all the required laws and regulations (apesb.org.au 2018). However, in case of the scandal of Tesco, the accounting employees can be found in violating the above-mentioned ethical principle with the adoption of aggressive accounting policies. By doing manipulation with revenue recognition and inflation of profit, the employees of Tesco violated the principle of integrity, objectivity, professional behaviour and professional competence and due care (apesb.org.au 2018).

Identification of Affected Parties

In order to analyse the whole accounting scandal of Tesco, there is a need to apply a specific ethical framework and this framework includes six steps. The first step includes the clarification of the facts of the accounting scandal of Tesco (Crane and Matten 2016). The second step involves in the definition ethical issues in the whole accounting scandal. The third step involves in the specification of correct alternatives. The fourth step involves in the comparison of values and alternatives. The fifth step involves in the assessment of the potential consequences. The last step involves in making the correct ethical decision (Weiss 2014).                   

The above discussion involves in the analysis and evaluation of the accounting scandal in Tesco due to the manipulation in revenue recognition and profit inflation. Now, it needs to be mentioned that the accounting scandal of Tesco has major negative effects some of their major stakeholders. The following discussion shows the description of the key stakeholders affected by Tesco accounting scandal:

Employees: Employees of Tesco are one of the major stakeholders affected by the accounting scandal of the company. Some of the employees acquiring higher-post in Tesco realised about the ongoing accounting malpractice in the company (Zona, Minoja, and Coda 2013). For this reason, they were under immense presser and faced nervous breakdown. Apart from this, many employees did resign from the job due to this accounting scandal. Thus, loss of job was another major aspect (Zona, Minoja, and Coda 2013).    

Shareholders: The next major stakeholder affected by Tesco accounting scandal is the shareholders of the company. To some extent, Tesco was able to show their strong financial position in financial statements with the help of illegal profit inflation. For this reason, many shareholders invested in the company in order to gain higher return. However, after the occurrence of the accounting scandal of Tesco, the share prices witnessed a major fall that led less retune on investment as expected for the shareholders. In this way, this scandal affected he shareholders of the company (Davies 2016).  

Customers: Customers are the next stakeholders of Tesco majorly affected by the accounting scandal. In the recent years, the customers consider the goodwill of the business organizations before dealing with them (Tihanyi, Graffin and George 2014). With the help of accounting manipulation, Tesco was able to depict a good image of them to the customers. However, the confrontation of the accenting scandal broke the trust of their customers that contributed to the downfall in the business of Tesco for some time (Tihanyi, Graffin and George 2014). 

Ethical Issues Involved

Suppliers: From the above discussion, it can be observed that the few employees of Tesco entered into agreement with their suppliers for the payment of advances prices by offering them extra benefits in the next years and the suppliers agreed to this agreement due to their own benefits. However, the confrontation of the accounting scandal contributed to the violation of these agreements that led to financial loss to the suppliers. In this way, the accounting scandal of Tesco affected their suppliers (Aggarwal 2013).      

Accounting Authority: It is the responsibility of the business organizations to comply with the regulations and principles of accounting standards and this aspect had no exception in case of Tesco as the company was also required to comply with all required accounting standards and principles (Pérez, Martínez and Del Bosque 2013). However, it can be observed that Tesco violated the required accounting standards by manipulating in the process of revenue recognition and profit inflation. This whole aspect downgraded the reputation of the accenting authorities in UK (Pérez, Martínez and Del Bosque 2013).

Thus, from the above discussion, it can be seen that the accounting scandal of Tesco had major negative impact on the company’s major stakeholders and it led to loss of reputation of the company.          

The above discussion shows all the related aspects of the accounting scandal of Tesco along with the major stakeholders affected by this corporate scandal. In this context, it needs to be mentioned that there are many accounting theories that can be uses in the case of Tesco for explaining the major reason for the occurrence of this situation in the company. These are all accounting theories related with the situation. Two of these major theories are Stakeholders Theory and Legitimacy Theory that have relevance with the case of Tesco and they are discussed below:

Stakeholders Theory: Stakeholder theory is considered as a major accounting theory. As per legitimacy theory, the main purpose of the businesses is the creation of values for the stakeholders of the businesses. In order to be sustainable over a long period, it is the responsibility of the company management to keep the interests of the key stakeholders of the companies like shareholders, customers, suppliers, employees and others (Bridoux and Stoelhorst 2014). It is said under this theory that the operations and decisions of the business organizations affect the key stakeholders of the companies. For this reason, it is required for the business organizations to make profit by satisfying the needs of the stakeholders in order to ensure positive growth. In this context, the major stakeholders of the business enmities are customers, employees, shareholders, suppliers, political groups, local communities, financial institutions, government and others (Taylor 2013). Thus, the companies are required to take into consideration all the requirements of these stakeholders.    

Application of Ethical Framework

Legitimacy Theory:  legitimacy theory is considered as another major accounting theory that connects corporate social responsibility (CSR) related activities with the organizational accounting and there operations. For this reason, legitimacy theory is considered as the most widely used theory for explaining the environmental and social disclosures. The derivation of legitimacy was done from organizational legitimacy (Deegan 2014). According to the concept of legitimacy theory, business organizations aim to ensure that they operate within the boundary and norms of their respective societies. As per this theory, it is the requirement for the business organizations to comply with all the required laws and regulations to which they confront. As per the demand of this theory, it is the voluntary requirement for the business organizations to report the activities that are expected by the major stakeholders and people of community.  Thus, the legitimacy theory is based on the notion that there is a social contract between a company and the society in which they operates (Rogowski 2015).               

The major reasons of the occurrence of the accounting scandal of Tesco can be explained with the help of the above two theories. The main notion of stakeholders theory lies on the fact that the business organizations create value by keeping the interests of the key stakeholders and it is required for the companies to provide the stakeholders with all the required information (Khan, Muttakin and Siddiqui 2013). However, in case of Tesco, the absence of this notion can be seen as the company did not disclose all the required information to the stakeholders about the adoption of aggressive accounting policies. Moreover, the main reason behind the adoption of this accounting policy was to fulfil their own interest that was to achieve the sales. Thus, with this action, the management of Tesco failed to keep the interest of their key stakeholders like shareholders, suppliers and others. This whole aspect can be considered as the major reason for the occurrence of this accounting scandal of Tesco (Benn and Dunphy 2013).

The reason can also be explained with the help of legitimacy theory. The main notion of legitimacy theory lies in the fact that it is the responsibility of the business organizations to disclose all the relevant strategies to the major stakeholders in order to legitimate their existence in the market (Bhattacharyya 2016). At the same time, this theory states that the companies are required comply with all the required regulations. In case of Tesco, it can be observed that a few members of the company did not comply with the accounting regulations and standards for their own benefits. This particular aspect indicates towards the adoption of substantive management technique by the management of Tesco that contributed to the material change in the accounting policies of the company (Nurhayati et al. 2016). Thus, all these aspects can be considered as the reason for the occurrence of accounting scandal in Tesco.    

Accounting Theories Related to the Situation

From the above discussion, it can be seen that some major reasons were responsible for the occurrence of the accounting scandal of Tesco. However, this accounting scandal might have been presented with the help of some specific steps. As per the stakeholder theory, business organizations create value by keeping the interest of the key stakeholders. Thus, it would be possible for Tesco to avoid this situation by keeping the interest of the stakeholders that did seek the employees to carry on the accounting operations as per required standards and principles (Klettner, Clarke and Boersma 2014). Apart from this, it was possible for Tesco to avoid this scenario in case the company did not inflate the profit for the fulfilment of their own interest. After that, according to the legitimacy theory, it is needed for the management of the companies to report all the relevant factors expected by the key stakeholders. Thus, in case of Tesco, it was required for the management to report the aspects that they would not be able to achieve their sales target in spite of doing manipulation in the figures of sales and profit (Hough, Jackson and Bradford 2013). Thus, with the adoption of these two aspects, it might be possible for Tesco to avoid the accounting scandal.    

Some major lessons can be obtained from the accounting scandal of Tesco. From the above discussion, it can be observed that the main issue in Tesco scandal was related to the fraud in accounting system of the company. Thus, it is required for the business organizations to implement the strategy of strong corporate governance in the organizations along with robust internal control in order to avoid these kinds of accounting frauds related issues. For this reason, it is required for the executives of the business organizations to show effective leadership for the implementation of effective internal control as well as corporate governance strategy (Tricker and Tricker 2015). For this reason, they must have an adequate look in the adequacy of internal control of the companies in order to retain the integrity of financial reporting. Apart from this, it is preferable for the business organizations to adopt strategies for the effective management and minimization of the accounting and financial risks. In case of Tesco, major issues can be seen in the accounting processes of the company (Tricker and Tricker 2015). For this reason, it is required for the business organizations to hire an unbiased third party in order to carry on the bookkeeping related accounting tasks of the companies as this aspect is helpful in preventing another Tesco related case. In the presence of outsources bookkeeping process, there is not any pressure from the top of the board to look things better in the financial aspects (Cheng, Dhaliwal and Zhang 2013).       

Lessons Learnt

The above discussion analyzes and evaluates all the aspects of Tesco accounting scandal. From the above discussion, it can be observed that Tesco had to witness a major accounting scandal in their organization due to the presence of major accounting fraud by a few management employee related to profit inflation and mal accounting practice related to revenue recognition. For this reason, Tesco had to face some major consequences like the payment of large amount of fine, the payment of compensation, loss in reputation and others. In this process, the management of Tesco violated some of the major ethical principles like integrity, objectivity, professionalism and others. The above discussion shows that the accounting scandal of Tesco affected the key stakeholders like employees, customers, shareholders, suppliers and others. The above discussion shows that the legitimacy theory and stakeholder theory has major connection with the case of Tesco accounting scandal. By applying the concept of these theories, it can be observed that Tesco might be possible to prevent the scandal by providing all the relevant information to the stakeholders. Moreover, it is required for the business organizations to implement effective corporate governance strategies for avoiding these issues.

• It is recommended that the business organizations are required to comply with all the required standards and principles of accounting and finance in order to carry on their financial operations.
• Companies are required to implement effective corporate governance as well as internal control in order to avoid the accounting frauds and scandals.

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