By Sarah Butler
The Financial Reporting Council will make retailers’ relationships with their suppliers a priority due to ‘increasingly complex arrangements’
Tesco’s profits overstatement has increased the focus on retailers’ relationships with their suppliers. Photograph: Jeff J Mitchell/Getty Images
The relationship between retailers and their suppliers is to be scrutinised in the wake of the Tesco accounting scandal – in which the group overstated last year’s expected first-half profits by about £250m.
The Financial Reporting Council (FRC), the UK’s auditing and accountancy watchdog, plans to make food retailing a priority sector for audit inspections this year.
The FRC will “pay particular attention to the audit of revenue recognition and complex supplier arrangements” at food, drink and consumer goods manufacturers, as well as retailers.
The ramp-up in regulatory activity comes after Tesco admitted it had artificially inflated profits by more than £263m as a result of the misstatement of payments from suppliers.
The matter is currently being investigated by the Serious Fraud Office (SFO), the grocery market watchdog – the Groceries Code Adjudicator – and the FRC.
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Paul George, the FRC’s executive director of conduct, said: “Events at Tesco did raise awareness of this issue but [the new regulatory focus] wasn’t only as a result of Tesco.
“We have been seeing over a period of time the complexity in arrangements between suppliers and their customers increasing.”
He said there were accounting and audit risks involved when relationships between suppliers and their clients evolved over time and this was not reflected in their original contracts.
“More transparency is a good thing,” George said.
A “significant proportion” of the 140 audits the FRC plans to inspect this year will be retailers and their suppliers, alongside other priority sectors including insurance, business services and companies servicing mining and oil companies, according to the body’s annual report, which is published on Friday.
The retail inspections will be separate from the FRC’s investigation into Tesco’s former auditor PwC and individuals within the retailer, in relation to the preparation, approval and audit of accounts going back to February 2012.
George said he could not indicate when that investigation would be concluded.
PwC, which was ousted as Tesco’s auditor this year, and individual chartered accountants working for the supermarket could potentially face unlimited fines, legal costs and exclusion from the profession if the accountancy watchdog finds evidence of misconduct.
Tesco has said it is cooperating fully with all the investigations it is facing. On Thursday, that led to speculation that the supermarket could be one of the first companies in the UK to strike a new type of deal with the SFO which would enable it to avoid a criminal prosecution.
Under new powers introduced last year, the SFO can offer a “deferred prosecution agreement” (DPA), a deal requiring high court approval, which includes fines and other undertakings if that is considered to be in the public interest and a company cooperates.
A DPA deal does not protect individuals who might face criminal charges with the help of evidence provided by the company.
In a speech last week, Ben Morgan, the SFO’s joint head of bribery and corruption, said the watchdog had handed out its first invitation letters for companies to enter into DPA negotiations.
Tesco and the SFO declined to comment on whether Tesco was among the companies to have been sent a letter.
However, lawyers said such a deal could appeal to Tesco because it could bring about a settlement within months rather than the three to five years that a full SFO investigation entails.
“A DPA deal could bring about a much swifter resolution for Tesco,” said Robert Amaee, a partner at law firm Covington and the former head of anti-corruption at the SFO.
“If Tesco is one of the companies in settlement discussions with the SFO, it will have provided the SFO with evidence against senior individuals implicated in any alleged wrongdoing,” he added.
Meanwhile, Tesco’s historic accountancy problems were highlighted again on Thursday when a US law firm said it had signed up a number of British institutional investors to pursue compensation for losses relating to the supermarket’s profits overstatement.
Tesco Shareholder Claims, which is supported by US law firm Scott and Scott, said it had also hired barrister Philip Marshall QC, one of the lawyers who acted for Paddy McKillen in his fight over Claridge’s hotel with the Barclay brothers.
The group said that, following advice from Marshall, it was “already clear that the case against Tesco is strong and will involve a substantial claim”.
In Tesco’s annual report released last week, the company said any legal action resulting from the SFO investigation or from legal action by shareholders “could have a material and adverse impact on the group’s financial condition.”