11 years ago there was a retail accounting scandal which led to the dismantling of Ahold as an international retailer. On February 24th, 2003 the CEO and CFO resigned having declared an overstatement of profits of $500mn (subsequently revised upwards to $900mn) over the three years from 2000 to 2002. Its market value plunged by 63% that day, to 3.3 billion euros. In late 2001, it had exceeded 30 billion euros. Tesco’s market value went down by 12% on the day it was announced, though its share price and stock value have been on the slide for the last years halving from a high in mid 2013 of 388p per share to its current 193p.
There are similarities between the two as both revolve round the treatment of rebate income. In Ahold, buyers at the Foodservice subsidiary were in collusion with suppliers on overstating promotional allowance income. The suppliers went so far as to confirm falsely inflated balances to outside auditors as part of their year-end audit. The scandal took place over the course of years and was linked to a sustained failure of corporate governance with an overpowerful CEO. In Tesco corporate governance has worked as a whistleblowing person from Finance has lifted the lid on the bad practices. The acid test will be whether this is a one-off manipulation that has been used to flatter the half-year results – the leadership team have been under enormous pressure to deliver results this year – or whether this has been going on for years. If it is the former then whilst disappointing the company should move on, and be pleased that they did not allow the problem to build up as happened in Ahold. If it is the latter, and it became too difficult to sustain when the results got worse this year, then Tesco will face a number of more serious questions.