Tesco investigated for improper Rebate Accounting

I saw from the WSJ today that Tesco is in hot water over rebate accounting. My colleague Peter Smith covered this over in SpendMatters UK (see Tesco profit warning - the supply chain bites back) and explained the rebate issue as follows:

The latest scandal, which saw an announcement yesterday that profits may have been overstated by £250 million in the recent half year results, has a real link with procurement and supply chain matters. The over-statement appears to relate to rebates from suppliers – for hitting a certain level of sales, or in support of promotional activity (“buy one get one free” for instance).  Now Tesco must estimate halfway through the year how much these rebates will be worth at the end of the year. And as Tesco’s sales volumes have declined – mainly because of competitors’ success – then there must be a greater risk that the trigger levels for rebates will not be hit. So it may be that risk which was not reflected in the profit figures. Tesco may have been “booking” these promotional rebates based on historic precedent rather than on current volumes.

Tesco's auditor PricewaterhouseCoopers said in May that the company's booking of commercial income was a specific area of focus in its latest audit report. The booking of such income and costs is a gray area.

This matter is of grave concern – the issue is material and every Treasurer and Controller should get nervous that run rebate programs. This comes at a time when regulators are set to require accounting firms to identify the partner in charge of an audit. Audit firms are fighting this one, as it's all downside with no upside.

As a smart investor once told me, odds are there’s at least one Fortune 50 company who has cooked the books. I bring this up because most of us do not take the time to understand banks or corporates balance sheets. And most of the time, the people running the place and their accountants don’t either.

I wonder what the banks who put Buyer led SCF programs in are thinking about some of their programs.

Scary yes, reality also.

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