Tesco could have faced an accounting black hole of £600m in 2014 if misreporting practices had continued, and two finance staff quit because of concerns over unlawful practice, according to the prosecution in a legal action against three former directors at the supermarket chain.
Carl Rogberg, the former finance director of Tesco UK, John Scouler, the former commercial director for food, and Christopher Bush, the former managing director of Tesco UK, have all been charged with one count of fraud by abuse of position and one count of false accounting.
The case relates to an alleged hole in Tesco’s accounts revealed by the grocer in September 2014. The supermarket admitted it had previously overestimated profits by about £250m. The announcement sent “shockwaves” through the stock market, Southwark crown court in London heard.
The Serious Fraud Office (SFO) launched a criminal investigation into accounting practices at Tesco in October that year. The three men deny any wrongdoing and have pleaded not guilty.
Sasha Wass QC, for the SFO, told the court that in an August 2014 meeting, Bush had been presented with documents outlining a hole in the accounts for the 2014-15 year. At the meeting was a member of the finance team, Amit Soni, and the group’s commercial directors.
Wass said the directors present had all expressed concerns about what they were being asked to do. Their concerns centred on a process called “pull forward” – in which income from suppliers which should have been recognised in future years was recorded early.
“At the end of those meetings, Mr Bush would have known that the hole in the accounts by the end of the year could be as large as £600m if nothing changed,” she said. “These documents presented a gap of £475m.”
Wass said “despite being given this rather critical news”, Bush remained calm and then passed up opportunities to inform Tesco’s chairman and the incoming chief executive, Dave Lewis, about any problems with the accounts. She said Rogberg had also failed to raise the issue with Tesco’s auditors, PricewaterhouseCoopers.
However, members of Rogberg’s team were becoming increasingly concerned. Two members of the finance team felt so compromised by the misrecording of profits that they resigned “rather than engage in what they considered to be practices that were unlawful”, Wass said.
Richard Parsons, a finance project manager, sent an email to his manager just before he resigned, saying: “The current situation has broken me.”
Wass said Parsons did not even feel able to share his concerns about what was going on at Tesco with his wife and had told the HR department that others were “scared to speak out as they were worried about losing their jobs”.
Another employee, Aysen Nadiri, resigned after becoming “increasingly concerned” about the instructions from senior management.
Soni then commissioned a report – “under wraps” – outlining the scale of the problem caused by pull forward after feeling that Bush, Rogberg and Scouler were not dealing with such concerns.
Wass said Soni wanted to compile an “unanswerable document” that clearly defined the scale of pull forward from each product category.
This report, which he called “the legacy paper”, outlined “in plain English, so that it would have been plain to anybody reading it, that there had been an overstatement of the accounts, the falsification of documents and that people were resigning in protest”.
It identified practices including income being booked up to five years early, sending invoices to suppliers for income not earned and raising invoices in one financial period that were repaid by a supplier in the next.
Soni wrote to his colleagues saying “the whistle is about to blow”.
Wass said all three defendants were sent the document and Scouler read it out to Bush in a conference call after a request by Soni.
After a few days, none of the defendants had mentioned the information it contained to Lewis and so Soni took the paper to Tesco’s legal department. The executive he handed it to, Kay Majid, “recognised a hand grenade when she saw one” and the document was sent to the new chief executive.
Wass said the contents of the paper were “a complete shock” to Lewis, who had arrived at the underperforming Tesco less than three weeks earlier. The information was then “dealt with as an emergency”.
Lewis commissioned reports by the group’s internal and external auditors, issued a correction statement to the stock market and later asked Deloitte to conduct an independent review.
Deloitte confirmed Soni’s findings and found that pull forward had been part of the culture at Tesco, even mentioned in staff appraisals as far back as 2010.
The case, which is expected to last until Christmas, continues.
