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Alarm bells not heeded [Sunday Herald (Scotland)](Sunday Herald (Scotland) Via Acquire Media NewsEdge) GREY AREAS Alarm bells over accounting practices at Tesco had been ringing for at last a couple of years before the horsemeat scandal broke in 2013. Julie Palmer, a partner with the specialist business recovery firm Begbies Traynor, said that as early as 2011 market analysts had been raising concerns about how Tesco was maintaining its profit margins at a time when recession had hit food sales. "It appears that Tesco has used the flexibility in the rules to their own advantage by reporting income early and deferring the costs of transactions. Seemingly they have reported to their own advantage the income side of transactions but not the costs." Palmer said that accounting is an "inexact science" as so many of the auditing parameters are open to interpretation. A company in financial trouble often has the opportunity to exploit that flexibility to its own advantage, she said. But changing accounting standards is not the answer to improving corporate governance, she said: "You are always going to end up with grey areas. These rules have to be applied to a myriad of different kinds of businesses and it is not possible to have standards for one size that fit all." Tesco has long had a reputation for its "aggressive" treatment of suppliers, particularly when it comes to negotiating rebates (see main piece), Palmer said. An example of such behaviour is the fact that Tesco insists on terms - which are widely resented by the supermarket's suppliers - that allow it to extract payment for rebates directly from suppliers' bank accounts. Jack McLaren, a partner in the Glasgow branch of accountancy firm Johnston Carmichael, said that with so many variables, making a decision about whether a set of accounts give a "true and fair" picture of a company's financial position is largely subjective. A fundamental tenet of accounting is the flexibility to provide a "true and fair" view of a company's financial health, but that flexibility also enables "creative accounting". According to Edinburgh-based regulatory lawyer Tom Stocker of Pinsent Masons, the inquiry into the Tesco scandal by accountancy company Deloitte is likely to be concluded within a matter of days rather than weeks as it is in Tesco's interest to "rectify any mistakes as quickly as possible". The main question is whether there was deliberate misrepresentation of the company's financial position or whether its interpretations of accounting standards are deemed to be within acceptable bounds. Meanwhile, Dr Mohammad Hudaib of the Adam Smith Business School of the University of Glasgow said that introducing more forensic accounting techniques to the auditing of a company would be a considerable improvement on the traditional audit process, under which a sample of transactions are assessed for their accuracy. If the sampled transactions are found to have been correctly accounted for, the working assumption is that the rest of the company's accounts are likely to be correct. Forensic accounting attempts to analyse the factors that might motivate a company to book transactions in a particular way and is more likely to uncover irregularities. Hudaib also deplores the fact that plans to force companies to "rotate" their external auditors every five years were considerably watered down before new rules were introduced 10 years ago. Instead of companies being required to change their accounting company every five years, the only requirement is for the accountant in charge of the account to be changed. This is a missed opportunity, according to Hudaib, as there is nothing to stop a company retaining its external auditors indefinitely, which can lead to an unhealthily close relationship, making it hard for auditors to challenge the decisions of their clients, who are the paymaster. Large corporations almost exclusively use one of the "Big Four" accountancy companies to carry out their external audits. This also encourages over-cosy relationships between the company and its auditors. It would also have been desirable, Hudaib said, to break up the external audit work of large companies into smaller chunks. This would allow smaller accountancy firms to carry out parts of an audit - for instance, a company's sales or its payroll cycle could be audited separately. And Hudaib criticised a stewardship code on corporate governance published by the Financial Reporting Council in 2012 which aimed to reduce the incentives for top executives to obtain bonuses - these can be triggered by massaging the company's figures and statements using the techniques detailed elsewhere in this article. But as the stewardship code is not compulsory, it does not have the teeth to make a difference. (c) 2014 ProQuest Information and Learning Company; All Rights Reserved. |