Tesco saga a case of poor corporate governance

THE UK has recently been shocked by disclosures of accounting irregularities at its largest retailer Tesco.

The headline was that it had overstated its profits for the first half year by some £250 million (S$510.8 million) - quite a hole. No details have been made public, but it appears there were accounting "mistakes" in its dealings with suppliers. "Mistake" is, of course, a word that covers everything from deliberate to unfortunate. Whatever the truth, a mistake on such a scale calls into question the effectiveness of corporate governance at one of the largest retail organisations in the world.

Analysts are coy for obvious reasons, but it is thought that the mistakes include the acceleration of income from suppliers and deferral of providing for trading expenses. In laymen's terms, this is classic creative accounting. You may wonder how you get income from suppliers (it is usually the other way round). In retail, it is simple. Suppliers pay you to promote their products, they give you discounts on specific products and they pay you rebates for achieving certain volumes. Deferral of expenses is simply a matter of saying that this expense is not current - it belongs to a future accounting period. This includes the area of provisions for expenses that have probably occurred but have not been calculated - in …