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0 Task 2 – Integrity and Ethics in Financial ReportingIntegrity and ethical issues are playing a main role in every country. However, there is still a lot of company try to scam their investors in order to earn more profit. In our assignment, we would take Tesco Scandal (2014) as our example.Tesco scandal occurred when it has been set up to have overstated its profit by $250 million of its expected profit for the half year. The reasons for Tesco’s fraud is to recognize the competitive environment who was exposed to the society. Recently, Tesco had faced a fierce contention within the marketplace. The German hard-discounters, Aldi and Lidl implemented a low pricing policy that had caused difficulties to Tesco.
From there on, Tesco scandal begins which violated IFRS reporting requirements such as IAS 2, IAS 8, IAS 18, IAS 34 and IAS 37In IAS 2 – Inventories, Tesco overstates the stock as the report demonstrates the decrease in cost of sales before the items were really sold. The reason for this is to inflate the gross overall revenue rate. Besides, Tesco also had been capitalizing store activities as inventory rather than expensing the activities. Next, Tesco abused IAS 8 because, in both its interim and year-end financial statements for the year ended 2014 and 2015, it failed to adjust for the year ended 2013 and 2014 for the commercial income errors. In addition, Tesco recorded profit but deferred the associated costs and also operated by deduct the cost in the right period but inappropriately defer the related decrease in income. By saying that Tesco “delayed accrual of costs” means that failed to record expenses. In addition, in IAS 18 – Revenue, Tesco overstated their profit as the manager was approached to evaluate the temporary value for the discount by an individual judgment in view of the expected future transactions.
Lastly, Tesco neglected to disclose its increased commercial income balances, both on its statement of financial position and statement of comprehensive income and violated the “bright line” rule that contingent gains may never be recorded and which against IAS 34 and IAS 37. The consequences of this scandal is Tesco had to pay a total amount of $235 million fine to settle investigations by the Serious Fraud Office (SFO) and Financial Conduct Authority (FCA) and a total of $85 million in compensation to the shareholder and investor. This error had caused Tesco loss a lot of investors and shareholders. Established on the analysis, Tesco shares lost nearly half of their value in the months after the scandal erupted. Succeeding, the relationship with their supplier is end and management who participate in this event has been given the sack.To get rid of the problem occurred, corporations must demonstrate the proper “tone at the top”.
The management will have to prepare a good leadership standard and also insure that there is a well-build a corporate governance culture. Based to the analysis, Tesco scandal occurred is due to the loose in the financial reporting process and inadequate internal control which may allow the bookkeepers to bypass in reporting the number. Next, Tesco should outsource accounting services which will mitigate the conflict of interest. Tesco scandal can be avoided if hiring an unbiased third party to perform the bookkeeping for the pot. According to the analysis, Tesco’s internal bookkeepers are “playing around with the number” so it will “looks good” in the financial report.
So, the third party is to express an opinion on the reports in order to enhance the reliability of the report.Lastly, we can conclude that integrity and ethics are very important in a business. In order to ensure that all this issue can be avoided, many rules and regulation are implemented such as the IFRS standard. All this standard that implemented is to ensure less unethical problems occur.
