Every little helps...

The Tesco tale is so interesting that I almost wish I were still teaching - such a gift of a case study, we haven't had a meaty UK scandal for a long time. But what exactly is scandalous about it?

One important aspect is the highlighting of the very strange relationship that supermarkets have with their suppliers. When the perils of the demand for cheap food are discussed in the media, the focus is often on dishonesty by suppliers - the horsemeat scandal, for example, or poor animal rearing conditions. The trading practices of supermarkets are rarely discussed. I remember my shock years ago when interviewing an internal auditor who told me that milk suppliers operated without the protection of contracts and supermarkets could switch at a day's notice. Some of the media reports suggest that the revenue Tesco had booked did not materialise because the suppliers were refusing to accept the demands placed on them. In a previous post I was dismissive of the idea of supply chain governance but there are clearly ethical issues to be explored here and opening these up to media scrutiny is not a bad thing.

In terms of accounting practice, what, if anything, has gone wrong? Revenue recognition is, despite accounting standards, a very subjective area. Early reports have noted that Tesco's auditors commented on the potential difficulties in this area but suggest that the audit committee responded that there was no problem and adequate controls were in place. The audit committee members have impressive backgrounds but none of them appear to have retail experience. How far have they and the rest of the board relied on advice from members of the executive committee? With all the recent changes among senior management, it would not be surprising if that advice was at the very least confused. Does this support my view of the unintended consequences of the purely NED board? And what about the role of internal audit?

If, as has been reported, the issue was revealed by a whistleblower, I wonder how the Tesco system works. This could be seen as a positive feature in that the company listens to whistleblowers but what protection will be in place for that brave individual?

Watching all this unfold will make for riveting reading but we should not forget the consequences for individuals. Actions taken to retrieve the company's situation may mean job losses in stores and distribution, as well as in suppliers' businesses.