Anthony Hilton: Suppliers must come clean in Tesco scandal, too

Tesco was discovered to have fiddled its accounts by manipulating payments to and from its suppliers.

Hundreds of millions of pounds were involved and the sheer scale of what was going on led to the inevitable inquiry, the results of which were published last week.

The Groceries Code Adjudicator’s report told a story of suppliers being billed for promotional expenditures, agreed prices being changed and multiple invoices being issued for the same goods — the purpose of which was to accelerate payments into the group or generate additional revenues that together allowed Tesco to claim it was hitting its profit and growth targets.

To the layman, it painted a seedy picture — but not apparently to those who have spent a lifetime dealing with the UK’s supermarket groups.

Indeed, someone now retired who was formerly in charge of Europe for one of the big American consumer goods manufacturers said that outside investigators “never get close to what really goes on in business” and pick up on only a fraction of what companies really get up to in seeking to secure a good position on the supermarket shelves.

His firm was a supplier to Tesco, and therefore on the other side, and this raises an issue that seems to have been neglected in all the coverage since the report’s publication: it takes two to tango.

If Tesco’s accounts were wrong because they were manipulating supplier payments, it implies that the accounts of the business on the other side of the deal — the supplier — must have been wrong too.

The lack of interest thus far in this aspect of the affair has been because Tesco has tens of thousands of products on its shelves, and it has been assumed therefore that the effect on any one single supplier would not be material.

But this ignores the reality that very many of those products come from just a handful of suppliers. Any visit to a supermarket confirms that a few big groups account for the bulk of what is on the shelves, even if there is also a long tail of small suppliers.

Reading between the lines, that also comes through in the report. It talks of sums running into the millions being up in the air for months. A small supplier could not cope with the damage that would do to their cash flow; in a manipulation of this size the counterparty has to be one — or all — of the big boys.

That leads us to ask whether it is only Tesco which needs to adjust its accounts or whether there have been material inaccuracies in the figures produced by some of its suppliers.

Here the report strikes something of a hollow note. It says that it has taken the issue of confidentiality seriously and adds with pride that no supplier has been named, nor should it be possible to identify any supplier from information in the report.

This might be fine from the perspective of Tesco, and no doubt it is a matter of delight to the suppliers that they are not publicly in the frame.

But does such secrecy meet the wider interest of public policy? Does it satisfy the needs of investors, and does it add to or subtract from confidence in the integrity of accounting and the public markets?

There are serious questions about what went on here, who was involved and over what time period. This requires more disclosure, not less.

Given that the Tesco mis-statement amounted to several hundred million pounds, it is reasonable to think the impact among the big suppliers could run into the tens of millions of pounds each, a sum which may in some cases be quite material.

That leads us to ask further what was the attitude of the auditors while this was happening. Were they ignorant of what was going on, in which case were they doing their job properly, or were they complicit in what was going on, in which case again were they doing their job properly?

And did it matter if sometimes the auditor of Tesco and the auditor of the supplier were the same firm, PwC, in those days?

Could the auditor to the supplier voice doubts about the treatment of the invoices without in effect challenging the work of the auditor of Tesco — which in some cases would have been the same firm?

Given the sums involved and the public interest, this does seem a legitimate area of inquiry for the Financial Reporting Council (FRC), the body that acts as custodian for the integrity of published accounts and also acts as a disciplinary body for the audit profession.