Reputation; Tesco Financial Scandal

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1. INTRODUCTION

Without contradiction, most successful firms shall attest the significance of reputation on their success. Bad Name is aligned with poor performance, and less trust from the public hence calls for a quick action from the firm (Bowes, 2014). Denial, Justification, explanation, rationalization, and provision of an excuse are the major strategies to get incorporated to ensure attainment of an optimum solution to name damage.  Denial entails refusal of the occurrence of the cases that led to the name damage. Denial may also be replaced by justification and explanation that involves justifying the rightfulness of the case causing Name damage (Bowes, 2014). This strategy is followed by either rationalization or provision of an excuse to cover the case tarnishing the firm’s Name i.e. by providing a proper reason for the controversial case. Employment and engagement of the firm on these strategies shall ensure correction of the business’s names.

This paper is based on Tesco financial case that involves overstatement of over £263m in the half-year profits. Tesco claimed in its announcement that it had over-optimistic accounting on its payments from its suppliers and the overall company costs. The news came in as a shock to the society with the media widely covering the case to ensure great understanding of the crisis. This crisis results in great implications for the firm as the stakeholders wealth maximization are put at risk, damage of corporate reputation, loss of customers to the competitors and four senior finance staff got suspended. The crisis leaves the stakeholders greatly affected as the firm was wiped off over £2bn on its market value and share prices decreased by 10%. However, Tesco seeks to revive and protect its reputation through engaging the stockholders and applying strategies to defend its legitimacy to the society effectively. This move equips the firm with great potential of reviving its coverage and value in the market.

2. CASE

2.1 Context

In 2014 September 22nd, Tesco was involved in an accounting scandal where Tesco Company affirmed to have overstated its profits.  Tesco revealed that there was an overstatement of profits by £250 million during the financial reports for the first-half period. What profit overstatement mean? Profit overstatement means the provision of incorrect and financial data more than the actual data. Tesco reported incorrect profit amounts that were more than the actual profit amounts attained in the first half period, hence an overstatement of the profits attained during the same period by the company. Tesco’s over £250 overstatement with an increase to £263 million in the publication of the first quarter results. This financial scandal follows the battles of the company in fighting the falling sales and the low profits it was experiencing. Tesco claimed in its announcement that it had over-optimistic accounting on its payments from its suppliers, and the overall company costs (Farrell, 2014). The Telegraph Investor magazine quotes the claims as, “accelerated recognition of commercial income and delayed accrual costs” (Ruddick, 2014)  Tesco has been paying its suppliers later and taking funds from them earlier than required, a great contributor to the menace.

According to Deloitte’s investigation reports, it is perceived that the profit inflation as artificially made posing great chances of intended action.  £118 m of the £263m overstated was found to be related to the first period of the year 2014, and the remaining £145m was found to relate to the previous year’s meaning the overstatement had started years before (Butler, 2014). According to other financial analysts, it is believed that Tesco knowingly pulled forward payments from its suppliers to portray a more attractive picture of the finances of Tesco Company that was struggling to meet the set profit targets. However, claims of fraud were dismissed based on the fact that nobody benefited from the overstatement act of the firm (Tesco PLC, 2014).

Tesco’s financial crisis comes in as a big blow to the company as it happens at a time when the Company is fighting to pull up on its ailing performance in the UK and global market.  The shareholders are the major victims of the crisis as unprofitability adversely affects their wealth. The Overstatement act crisis resulted in an intensive fall in the market value of the Tesco retailers followed by a 10pc share price fall reflecting more than £2bn getting wiped off its value following the break of the overstatement of profits.  The 10pc share price fall reflected a great downfall in its share prices down to a 14-year low that triggered numerous investigations on the causes of such a decline by the Britain’s fraud agents (Irish Times, 2015).

The profit overstatement is a serious reputational damage to the company; hence great actions followed up in the aftermath of the scandal. The firm suspended four senior financial staff members following the scandal. However, the firm’s management stated that the suspension was not a disciplinary act, but a step aside of these staff member to allow investigations. The former chief executive who left office in August was also brought in the menace as the overstatement problem was perceived to have started in his management time (Ruddick, 2014). Tesco as a company has also faced a corporate reputational damage following the scandal, and it is estimated that it has lost over £13.5 bn of reputational value since the end of 2011 (Cole, et al., 2014). (See the graph in the appendices)

2.2. Data

Full disclosure is a key accounting principle that ought to be practiced by firms in ensuring sustainable reporting. This principle involves engaging the stakeholders in multiple communications to disclose the known and the unknown in the practices and performance of a firm. Tesco values this principle and strives to communicate with the stakeholders on the causes, effects and how it plans to handle the crisis so as to maximize the shareholders wealth and protect the firm’s reputation in the market (Myth Photography in Advertising; A Semiotic Analysis, 2006). There are different ways through which firms can communicate with its stakeholders. These ways include; email, advertisements, press releases and through social platforms (Bowes, 2014). Based on Tesco’s case, a press release was the mostly used means to communicate to its stakeholders. Through different press releases, Tesco CEO Dave Lewis published a press release communicating to the shareholders on the occurrences of the crisis at Tesco (TESCO PLC, 2015). The communication availed the fact that the firm valued its stakeholders and was seeking to win back their trust.

Number	Date	Title
1	10-july-14	Appointment of Chief Financial Officer
2	21-july-14	Appointment of Chief Executive Officer and Trading Update
3	22-july-14	14 Companies Act Section 430(2B) statement – Philip Clarke
4	28-july-14	Appointment of Chief Financial Officer
5	29-August-14	Trading update
6	22-september-14	Trading Update (crisis date)
7	23-September-14	Chief Financial Officer starts date
8	29-October-14	Regulatory Update
9	9-December-14	Trading Update
10	3-February-15	Statement on former directors’ remuneration
11	7-October-15	INTERIM RESULTS 2015/16

 

2.2. Methodology

Reputation damage poses adverse effects on the productivity of firms across the globe. Firms opt to incorporate effective measures to help in gaining back the legitimacy of the firm. Denial, Justification, explanation, rationalization, and provision of an excuse are the major strategies to get incorporated to ensure attainment of an optimum solution to name damage (Bowes, 2014).  Denial entails refusal of the occurrence of the cases that led to the name damage. Denial may also be replaced by justification and explanation that involves justifying the rightfulness of the case causing Name damage (Bowes, 2014). This strategy gets followed by either rationalization or provision of an excuse to cover the case tarnishing the firm’s Name i.e. by providing a proper reason for the controversial case. Employment and engagement of the firm on these strategies shall ensure correction of the business’s names.

3. FINDINGS

Tesco employs the explanation based strategy where the CEO steps up to explain the occurrences of the crisis to the stakeholders. The CEO affirmed that the overstatement of profit was accidental and not intentional (Wearden, 2014). He also communicates to the stakeholders informing them that all the occurrences in the firm shall be solved and assures the stakeholders on the safety of their investments despite the scandal (Butler, 2014). Moreover, the firm also employed the denial strategy whereby the company the company denies of having caused the scandal and protects the senior finance managers from the scandal by only suspending their functions for investigation. By this, Tesco can convince the stakeholders of the legitimacy of the firm’s employees by not connecting them to the scandal (Farrell, 2014). Tesco also uses the justification strategy whereby despite the earlier notification of the crisis, the company ignores the notification and still justifies its ignorance as being an accident. Tesco denies its cause for the scandal so as to elude from being blamed for the scandal by the stakeholders.

4. CONCLUSION

In conclusion, Reputation and Legitimacy are paramount tools for the success of businesses in meeting their objectives.  Numerous firms get seen to engage in day to day struggles for the public trust across the globe. Intentionally or unintentionally, most firms have experienced reputation damage following its corporate governance or practices. Frequently, most firms get aligned to bad practices that result in the damage of a business’s name. Denial, justification, explanation, rationalization and provision of an excuse stand out as the elementary strategies to provide a solution to reputation damage. These steps and strategies assure coverage of all the public’s needs in the effort to correct the name damage.

Tesco is the UK largest retailer involved in a financial crisis where it overstated its profit of 2014 first half period that leads it to legitimacy doubts. Tesco seeks to restore its legitimacy by incorporating effective strategies to help win the trust of the stakeholders. Tesco employs explanation based strategy, denial and justification strategies in solving and restoring its legitimacy. Through these strategies, the firm communicates to its employees to convince them of the legitimacy it holds and to assure them of the safety of their investments. Tesco employs the use of press releases to communicate to its stakeholders whereby its CEO gets to assure the stakeholders on the legitimacy it portrays despite the scandal. Tesco is, therefore, left in a better position to restore its reputation following the damage caused by the scandal.

 

References

Bowes, Barbara. 2014. Reputation Damage. Legacybowesgroup. [Online] 2014. http://www.legacybowes.com/working-world-organizational/101-reputation-repair.html.

Butler, Sarah. 2014. Tesco and PWC face fresh inquiry over 263m Overstatement of profits. The Guardian. [Online] December 22, 2014. www.theguardian.com/business/2014/dec/22/tesco-pwc-inquiry-accountancy-watchdog-profit-overstatement.

Cole, Simon and Macleod, Sandra. 2014. Tesco and the true cost of losing a good reputation. Management Today. [Online] December 1, 2014. www.managementtoday.co.uk/news1323419/tesco-true-cost-losing-good-reputation/.

Farrell, Sean. 2014. Tesco to be investigated by FCA over accounting Scandal. The Guardian. [Online] October 1, 2014. www.theguardian.com/business/2014/oct/01tesco-investigated-fca-accounting-scandal.

Irish Times. 2015. Tesco faces huge compensation claim over profit Mishap. The Irish Times. [Online] March 24, 2015. www.irishtimes.com/business/retail-and-services//tesco-faces-huge-compensation-claim-over-profit-mishap-1.2151034.

Myth Photography in Advertising; A Semiotic Analysis. Page, Janis Teruggi. 2006. 2, November 2006, Visual Communication Quarterly, Vol. 13. 10.1207/s15551407vcq1302_3.

Ruddick, Graham. 2014. Tesco Accounting Scandal. The Telegraph Investor. [Online] September 22, 2014. www.telegraph.com.uk/finance/newsbysector/epic/tsco/11113002/Tesco-accounting-scandal/QandA-what-happens-next.html.

TESCO PLC. 2015. Key Facts. [Online] 2015. www.tescoplc.com/index.asp?pageid=71.

Tesco PLC. 2014. TESCO PLC. [Online] 2014. www.tescoplc.com/mobile/index.asp?pageid=2&newsid=1060.

Wearden, Graeme. 2014. 2bn Wiped off Tescos value as profit overstating scandal sends shares sliding as it happened. [Online] 2014. www.thegurdian.com/business/live/2014/sep/22/tesco-launches-inquiry-after-overstating-profit-forecasts-by-250m-business-live.