Tesco-style accounting risks well known in retail industry

Tue Sep 23, 2014 4:13pm EDT
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By Tom Bergin

LONDON (Reuters) - Tesco Plc's disclosure of huge accounting mistakes over contracts with its suppliers shocked industry analysts and executives, but not because they didn't realise the potential for disaster.

On the contrary, they assumed that everyone in retailing was fully aware of the risks involved in accounting for rebates paid by suppliers to Britain's biggest supermarket groups, thanks to auditors' warnings.

Therefore Tesco's (TSCO.L: Quote) revelation on Monday that it had overstated its profit forecast for the first half of the year by 250 million pounds ($409 million) came as a nasty surprise and wiped 2 billion pounds off its stock market value.

Auditors routinely list risks that companies may face, and this year they have raised the supplier rebates - which have become a major part of the grocery business - in a number of firms' accounts following a change in disclosure rules.

The auditors for all three of Britain's biggest publicly-quoted retailers - Tesco, Sainsbury's (SBRY.L: Quote) and Morrisons (MRW.L: Quote) - told investors in their most recent annual reports that their businesses faced material risks regarding the reporting of the supplier rebates. Those at the smaller online retailer Ocado did likewise.

These cash payment or discount deals take many different forms, but suppliers typically offer them to the retailers in return for additional efforts to promote their products.

Accountants said that such disclosures by auditors reflected more the growing importance of the supplier rebates than worries that companies didn't know how to account for them. "The rules are pretty well established," said a senior auditor at one big accounting firm who asked not to be named.

Companies can even buy software packages to help to track, analyse and account for such payments.   Continued...

Shopping trolleys are seen at a Tesco Express in southwest London September 22, 2014. REUTERS/Luke MacGregor