Tesco shocked the City yesterday by revealing it had discovered pre-tax profits for the last six months have been overstated by £250m.
The accounting issues relate to commercial income – any money that exchanges hands between suppliers and Tesco. Why has there been no investigation by the grocery watchdog?
What has happened at Tesco?
While exact details will not be clear until an investigation by accoutancy form Deloitte and lawyer Freshfields is concluded, the issue relates to payments from suppliers reported in the wrong time period and reporting of associated costs.
Is there an inquiry by the grocery ombudsman?
No, not yet. The Groceries Code Adjudicator – an independent body that oversees the relationship between supermarkets and their suppliers – is not at present running any investigations relating to Tesco and its suppliers.
Only direct suppliers to a retailer can make a complaint against that company. A Tesco insider, not a supplier, flagged the profit overstatement to the retailer’s general counsel last week. Unless a supplier approaches the adjudcator it would not get involved. Tesco has alerted the Financial Conduct Authority to the issue.
Some say there have been issues between Tesco and suppliers for a while. Why have there been no complaints?
Broker Cantor Fitzgerald issued some research in November 2013 titled A desperate move?, and in October 2013 titled It’s just an illusion, questioning how Tesco was supporting UK trading margins in the light of falling sales and rising costs.
Analyst Mike Dennis estimated that Tesco had been overstating its UK commercial gross profit by £200m or more per annum by deducting monies from suppliers’ trading accounts or extending payment dates without notice.
The broker said Tesco had been in contact with hundreds of suppliers either demanding additional payments because of lower commodity prices or deducting money from supplier trading accounts before they are paid to suppliers.
The grocery ombudsman was established in summer 2013 to monitor interactions between retailers with sales of more than £1bn and their suppliers. An aim was to stop retailers making variations to supply agreements without notice.
So the fact that the ombudsman is not running any investigations into Tesco means that suppliers could have negotiated deals they are happy with. Others may be in discussions directly with Tesco, and some could have swallowed any changes - perhaps grudgingly - in order to maintain their business with the grocer.
Are there likely to be any investigations by the grocery ombudsman?
Now that Tesco’s profit overstatement has been brought to light publicly, it is posssible the ombudsman may receive some complaints from direct suppliers.
Tesco discloses £250m overstatement of profit forecasts
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