Tesco Fraud Charges, Cattles and Globo

The Serious Fraud Office (SFO) has charged three former managers of Tesco in relation to the overstatement of profits that occurred over several years and which came to light in 2014. The charges are fraud and false accounting and those charged are Carl Rogberg (finance director at the time), Christopher Bush (UK Managing Director) and John Scouler (UK Commercial Director).

The former Chief Executive, Philip Clarke, has not been charged but is apparently still under investigation in relation to the offences. Neither has the company itself been charged been charged with fraud.

These charges might assist with the legal cases being pursued on behalf of shareholders in the company (see Stewarts Law, et al) because more evidence to support their claims may come out in court, although the balance of proof is of course lower in a civil claim. The latter may need to await resolution of the criminal cases though.

The audit of the accounts of Tesco by PwC is also still under investigation by the FRC but no doubt they will claim that they were misled by the managers and directors of Tesco. However this is yet another example of shareholders being unable to rely on the reported accounts of a company despite them being audited which has become all too common of late. Tesco subsequently replaced PwC as auditors.

PwC were also the auditors at Cattles and was only recently fined £2.3 million for the audit of that company in 2007 (a reported profit of £165m should have been a loss of £96m). But even there it was claimed that the blame should mainly fall on the former finance directors who concealed bad loans. Cattles did pursue a claim on behalf of its shareholders against PwC for negligence but it was settled out of court.

PwC are also facing a record $5.5bn claim in the USA relating to the collapse of mortgage lender Taylor, Bean & Whitaker but it would be wrong to single out PwC alone for audit failings. The whole profession seems to be blissfully unaware of how poorly it is now perceived by investors. They think they are doing a good job when in reality they repeatedly fail to spot frauds of a quite obvious kind – for example in the case of Globo which ShareSoc has looked at in some detail (Auditors: Grant Thornton). Doubts were raised about the accounts of that company many months before the fraud was eventually revealed and the cash held in bank accounts by the company seemed to instantly disappear when it is one of the basic functions of any audit to verify bank balances.

The audit profession surely needs reform. One way to improve their performance would be to make sure they were held liable for incompetent audits which responsibility has been eroded in several ways in recent years. But a wider examination of the role of auditors and what they are expected to do would also be helpful.

Roger Lawson

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