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Published On: 11 February 2016
Things have gone downhill for Tesco Plc ("Tesco") since it issued a profits warning in August 2014, followed shortly thereafter by a trading update statement on 22 September 2014. This update advised that Tesco had:
"Identified an overstatement of its expected profit for the half year, principally due to the accelerated recognition of commercial income and delayed accrual of costs...the Board believes that the guidance issued on 29 August 2014 for the group profits for the six months to 23 August 2014 was overstated by an estimated £250m."
Immediately thereafter Tesco instructed Deloitte to undertake an "independent and comprehensive" review, which found the overstatement was larger than originally thought and in fact amounted to £263m. It was reported that the misstatement related to financial arrangements with suppliers over a period of time and its discovery led to the dismissal of eight executives, including the former chairman and chief executive. It is claimed that no individual made any personal financial gain.
The bad news then kept coming. Both the SFO and the FCA announced decisions to investigate the matter in October 2014, although following consultation with the SFO, the FCA discontinued its investigation. In the meantime, reports in the press in November 2014 suggested groups of Tesco's shareholders, both in England and in the US, proposed to commence proceedings for compensation for losses allegedly incurred as a result of the overstatement.
Some two months later on 22 December 2014, the FRC announced it had decided to investigate the work undertaken by PwC, as external auditor for Tesco predicated upon the preparation, approval and audit of the financial statements for the years ended 25 February 2012, 23 February 2013, and 22 February 2014. The outcome of this investigation is awaited.
Following Tesco's admission that it had been artificially inflating profits as a result of financial arrangements with suppliers, on 5 February 2015 the Adjudicator appointed by the Groceries Code Adjudicator Act 2013 ("the Code") announced that an investigation would be commenced into Tesco's compliance with the Code. The purpose of the Code itself is to address the adverse effect on competition arising from the exercise of buyer power by grocery retailers with respect to their direct suppliers of groceries, and the issue of compliance with the Code was included in the review undertaken by Deloitte.
The investigation focused on the delay in payments (paragraph 5 of the Code), and payment by suppliers in order to secure better positioning or an increase in shelf space (paragraph 12 of the Code), both of which have resulted in delays in payment to suppliers.
On 26 January 2016, the Adjudicator published her findings. She found that Tesco had committed a serious breach of paragraph 5 of the Code, which requires retailers to pay a supplier for groceries delivered in accordance with the contractual terms agreed with the supplier and in any event within a reasonable date of the invoice. This practice she reported was widespread within Tesco and was evident in every sector. She commented that: "The length of the delays, their widespread nature and the range of Tesco's unreasonable practices and behaviours towards suppliers concerns me. I was also troubled to see Tesco prioritising its own finances over treating suppliers fairly." However no evidence had been found of a breach of paragraph 12 of the Code.
The enforcement powers available to the Adjudicator for this investigation were limited to making recommendations or requiring information to be published with no power to impose any financial penalty. The recommendations made by the Adjudicator for Tesco to adopt are as follows:
Tesco are to provide a detailed implementation plan for these recommendations within four weeks of the date of publication of the report setting out how it would comply with the recommendations. Tesco are further required to provide responses on a quarterly basis to the recommendations in addition to providing sample documentation illustrating how it is providing suppliers with greater transparency and clarity.
The Adjudicator further commented that she had received evidence of practices at Tesco which merit further consideration where the purpose of the Code may have been circumvented, and that this may be to the detriment of smaller suppliers. She would therefore be making further enquiries within the sector to enable a view to be reached but had written to the Competition and Markets Authority ("CMA") on issues which may have contributed to payment disputes and delays.
Tesco has now issued a public apology and accepted these findings which they confirmed agreed with the outcome of its own investigation. This will not be the end of the matter and they will now have to wait to see how the ongoing investigations by the SFO and the FRC proceed, what action may be taken by the CMA and if the threatened litigation by the shareholders materialises.
Many will be surprised that Tesco have not been financially penalised for its conduct. This is because the ability of the Adjudicator to impose fines only came into force in April 2015, (following the commencement of the investigation) and provides a maximum level of fine of 1% of the relevant retailer's annual turnover.
The publicity which Tesco's conduct has attracted may serve to discourage future poor practices in the industry as may any criminal action subsequently taken against the former executives of Tesco involved with this conduct. It is reported that the SFO has interviewed a number of individuals and that discussions are in progress in relation to the terms of a deferred prosecution agreement. Failing an agreement being reached, charges are expected to be made imminently against former senior Tesco officials.
Prior to April 2014, the Applicant, a debt management firm, was authorised and regulated by the Office of Fair Trading ("OFT") and thus on the transfer of regulatory responsibility to the FCA, the…