Britain's biggest retailer faces a crisis situation two
weeks after announcing that it overstated its first-half profit
expectations by some £250-million. Tesco PLC, the
multinational grocery and retail giant headquartered in England,
reported on September 22, 2014 that its August 29 profit warning
should have forecasted trading profit totalling £850-million,
rather than the £1.1-billion that the company actually
reported – an inflation of nearly 25%. The market reacted
swiftly, and as of October 7, 2014 had knocked 20% (a total of
about £4-billion) off the value of Tesco shares. On
October 1st, Britain's financial regulator, the Financial
Conduct Authority, announced that is has launched a full
investigation into the accounting scandal. As the company rushes to
contain the situation and events continue to unfold, it is already
clear that this is a classic example of the potentially explosive
risks that public companies face every time they prepare and report
their financial status to the market.
Tesco has been for years the world's second largest retailer
after Walmart, though in recent times it has faced stiff
competition in Britain and Europe, together with declining profits.
Its September 22 announcement was the latest and most impactful
blow to Tesco's market value and reputation. Tesco has stated
that the profit overstatement was caused by apparent accounting
errors – including the early booking of revenue and delayed
recognition of costs – which were discovered during the
preparation of its forthcoming interim results. Those results have
now been delayed from October 1 to October 23. The company has
already begun an independent investigation into the accounting
irregularities. Four senior-ranking Tesco employees have been
placed on leave while the investigation proceeds. The accounting
error and misreporting, together with the precipitous drop in share
value and subsequent investigations, have been widely reported in
the business pages around the world.
The situation unfolding at Tesco is a prime example of how the
public may react to adverse news in unpredictable ways. Even after
the change to its reported profit, Tesco was still profitable. In
that sense, the market's reaction could be seen as
disproportionate. However, the news has clearly shaken public
confidence in the company. Commentators have suggested that in the
context of the other challenges facing Tesco, it may be an
indicator of deeper-lying and more serious problems. Tesco's
share price seems to have been punished so severely not because the
profit in one quarter was overstated, but because people are now
saying "I don't know what I don't know" about the
company in light of the fact that this happened. The same scenario
has been played out numerous times in Canada (Biovail, SNC Lavalin
and others) and elsewhere. It is also likely that the market has
factored in that this situation will inevitably engender other
expensive and distracting consequences, including the freshly
initiated regulatory investigation and rumblings of a possible
Public companies must ensure that they have in place a strong
corporate governance culture and robust internal systems designed
to prevent accounting and other problems. Commentators have long
held that the "tone at the top" is a key factor
contributing to the integrity of the financial reporting process,
and companies are well advised to have a careful look at the
adequacy of their internal controls on a regular basis. It is
always preferable to manage and minimize risk than to have to
respond to a crisis. Having said that, no company, however well
run, is immune to crises. Without knowing more, it is impossible to
say whether the situation at Tesco could have been prevented. What
is clear is that, as the Tesco case now demonstrates, a company
cannot unring the bell once news of an irregularity has broken.
Instead, Tesco must scramble to react to a growing crisis. People
will continue to watch with interest to see how, and how well,
Tesco is able to weather this storm.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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