Tesco’s Black Holes: Accounting and dealings with suppliers

It has been rather astonishing. Tesco, for year the doyen of the UK stock market made mistakes in its accounting which overstated its profits by £250 million. The mistake was published by Tesco, whose share price fell by about a quarter.

Apparently the mistake was “principally due to the accelerated recognition of commercial income and delayed accrual of costs”. It is a little hard to puzzle what this cryptic explanation really means, but the only meaning I can get from it is that Tesco had delayed payments to suppliers and made requests for contributions (which organisations like Tesco demand from suppliers to ensure that suppliers are a double profit centre) which were based upon sales which never emerged.

Somehow the contributions (which were never due) were counted as profits and the unpaid payments to suppliers fell into some black hole, and the net effect of these was to considerably overstate profits.

 

The incident shows not only that Tesco’s accounting leaves a lot to be desired but also its practices with its suppliers, many of whom are farmers, also leaves something to be desired.

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