Monday, April 3, 2017

Tesco PLC: An Accounting Scandal (2014-2015)


A Tesco super market in the UK

Tesco PLC runs out of the UK and is the seconds largest retailer in the world behind Wal-Mart. Dating back to the year 2013, Tesco began to run into financial troubles. Company chairman Richard Broadbent, along with other head executives realized that they were not going to meet their predictions for earnings. Instead of addressing the public, the company started overstating their profits and lying about their earnings. This accounting scandal would continue for almost two years until mid 2014 when the fraud went public. Broadbent would step down as chairman immediately, and the new chairman David Lewis began an investigation into the accounting fraud. Turns out that Tesco was overstating their profits by profoundly large numbers. "Profits would be overstated for the first quarter of 2015 by 326 million pounds ($407 million USD)" ( The Serious Fraud Office of the UK is leading an investigation currently, and it is estimated that Tesco will payout over 500 million pounds ($624 million USD) in fines by the end of this. Also, 125 institutional investors have filed a class action lawsuit against Tesco totaling over 100 million pounds ($120 million USD) claiming that Tesco lied to the stock market and thus lost them money. 


The stakeholders involved in this scandal include the suppliers, employees, and investors/shareholders. Tesco is in troubled waters at the moment, and many people are questioning their reliability because of this ethical controversy. Their suppliers are questionably at fault as well for possibly knowing of the fraud. Tesco employees are clearly affected by this scandal. Because the company is taking such losses, their could potentially be lay offs and closing of stores to make up for the lost profit. The shareholders are the number one stakeholder affected by the accounting scandal. Shareholders have lost a tremendous amount of money off their investments into Tesco. The shareholders are currently filing a lawsuit against Tesco for losing them money due to fraudulent activies.


An example of what the market looks like as it collapses
Individualism is also called the economic theory. According to famous economist Milton Friedman the only goal of business is to profit "so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud" (DesJardins 54). Tesco did not stay within the rules of the game, and by cheating they did not engage in open and free competition. This accounting scandal would go against the core principles of Individualism.    
Along with overstating their profits, Tesco is also being sued by 125 investors for over 100 million pounds. These investors lost money because Tesco "made misleading statements to the stock market" (Telegraph). When Tesco crashed after the scandal went public, these investors lost almost all their stakes in the company. Individualists would argue that Tesco acted unethically because not only did Tesco not abide by the rules of the game, but they also did not maximize shareholders wealth. 


The ethical theory of Utilitarianism “measures the cost and benefits of various actions and principles not just for their impact on one individual or company, but rather for all beings who are affected by the actions proposed or taken” (Salazar 19). The individuals affected in this controversy, or the stakeholders are suppliers, employees, and shareholders. John Stuart Mill believes that Utilitarianism is about maximizing happiness in all individuals. Specifically, Tesco only worried about themselves and did not maximize happiness in all individuals by lying about their profits. The shareholders were let down by Tesco. In this situation, investors lost a large sum of money because Tesco overstated profits behind closed doors without telling anybody. Stockholders in this situation are not happy due to Tesco's poor business decisions. In the eyes of Utilitarianism, this accounting scandal is unethical. 


Utilitarianism makes decisions based on consequences, whereas “Kantianism does not make decisions based on consequences, but rather on what Kant calls the “good will” (Salazar 21). To have good will means that a person must have “autonomy, or freedom, and rational agency, or the ability to reason, think, and act on their reasons” (Salazar 21). Kantianism looks at the will of the person who made the decision rather than the consequences that follow. In respect to Tesco, the men who are responsible for the accounting fraud did not practice good will in their decision.They knew what they were doing the entire time, and were fully aware that their behavior was illegal. Lying is not a rational decision, and for executives to lie is unethical. 
Also, “Respect for people’s freedom and rationality helps people to make good decisions” (Salazar 21). Tesco executives did not have respect for people's freedom and rationality. They made poor business decisions because they did not have any respect for those who would be affected by the accounting scandal. 
Ex chairman Richard Broadbent

Virtue Theory 

Virtue theory was developed by Aristotle. “All of the character traits that we say belong to people can be virtues or the opposite of virtues, which are called vices” (Salazar 23). Virtue theory focuses more on the character of people and the means of why they made a decision rather than the outcomes. The leaders of Tesco throughout the accounting scandal did not show good character. In other words, their vices showed more than their virtues.
The four main virtues of character include courage, honest, temperance, and fairness. Tesco failed to meet all four of these virtues during their unethical scandal. The main virtue Tesco did not show however was courage. Tesco was afraid they would not meet their predicted numbers and decided to lie. “Tesco pushed up its numbers to make things appear healthier than they actually were” (ACCA). The Tesco employees involved in this scandal showed poor character, and their behavior is considered unethical by a virtuous theory. Their vices proved to be a flaw of their character which is why they are being fined and charged with crimes.

Justified Ethics Evaluation

In my personal opinion, Tesco is completely in the wrong in this situation. Their behavior was about as unethical as it gets. Tesco had been forging their profits for over two years dating back to 2013 until they were caught in 2014. They had multiple employees in on this scheme as well which shows that the fraud was known around the company. Three of Tesco’s top executives in Chris Bush, Carl Rogberg, and John Scouler are mostly at fault for this accounting scandal.
It would not be as big of a deal to lie about one transaction, but Tesco overstated their profits by over $420 million USD for a longer period of time. That is an unusually high number, and because it was so large their company plummeted. It was unethical for Tesco to lie to their company, shareholders, employees, and customers of their performance. 


DesJardins, J. R. (2014). An Introduction to Business Ethics. New York, NY: McGraw Hill.

Dr. Salazar, Heather (2016). The Business Ethics Case Manual

Smith, Geoffrey. "Tesco Chairman Resigns after $420 Million Accounting Scandal." Fortune 
International., 23 Oct. 2014. Web. 3 Apr. 2017.

"Tesco Scandal – the Perils of Aggressive Accounting."Tesco Scandal | Student Accountant | Students | ACCA Global. Association of Chartered Certified Accountants, 11 Aug. 2015. Web. 03 Apr. 2017.

Armstrong, Ashley. "Tesco Hit with £100m Legal Claim over Accounting Scandal." The Telegraph. Telegraph Media Group, 31 Oct. 2016. Web. 03 Apr. 2017.

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