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Every little yelps

22 September 2014 By Chris Hughes

Tesco’s latest crisis has put Richard Broadbent in the last chance saloon. The chairman of the UK retailer is ultimately accountable for any failures in the UK grocer’s governance. That includes any that lie behind the 250 million pound hole in the accounts, revealed on Monday.

The shortfall relates to guidance given in August about interim results due next month. Tesco, which is audited by PricewaterhouseCoopers, says that forecast was flattered by an apparent acceleration of revenue recognition and a delay of cost accrual in its core UK food business. It is not clear if this merely brought forward profit that would be reported anyway. Nor is it clear whether malpractice is involved. The accounting issues involved require an unusual amount of judgment, according to a person familiar with the situation.

For a company of the stature of Tesco to reveal such problems is jaw-dropping. The failings relate to the period from late February to August, when there was a bigger risk of lax financial oversight. After the finance director quit in April, Chief Executive Phil Clarke soon took over his responsibilities. But then Clarke resigned on July 21, and his successor, Dave Lewis, only started on Sept. 1.

A substantial response from the board is needed. Tesco has rightly launched a full investigation with an independent auditor, Deloitte, and its retained law firm. But that is not enough. Deloitte must now do a deep dive into the entire accounts.

The episode also reinforces the need for a major review of strategy and governance. Tesco took its eye off the ball in its key market. It is starting to look ungovernable in its current form, running global operations with a price war at home. Managers should feel able to escalate problems to the board. At Tesco, do they instead feel pressure to tell the board what it wants to hear?

Broadbent inherited Clarke as CEO when he took the chair in December 2011. The business went into rapid decline, but Clarke was replaced only recently. True, other executives left after Clarke got the top job, and then it became clear there was no layer beneath to step up. But the impression remains that Broadbent could have acted sooner. His lack of prior retail experience isn’t helping, either.

With Lewis in the CEO job just three weeks, a change of chairman right now would only destabilise the situation further. That affords Broadbent a degree of protection. But his own future now depends on his ability to make Tesco stronger for this crisis.

 

 

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