Accountability, Representation and Control
This paper discusses the problem of overstatement identified in the Tesco accounting report. In this, it is identified that Tesco has shown overstatement of accounts in the annual report of half year ending in August 2014 by £250 million (Tesco Plc., 2015).
Because of this overstatement in accounts, Tesco faced several questions regarding the Tesco accounting system or process as well as on the leaders and auditors of the company.
This paper will focus on identifying that accounting representation which enables to take place such overstatement incident. In addition to this, Tesco annual report will also be analyzed for identifying the person accountable or reason for doing the overstatement of accounts. This paper will also focus on recommending the ways and form of a control system that is required to be considered by the company Tesco for avoiding the future reoccurrence of a similar incident.
Overall, this paper will help in identifying and analyzing in-depth the issues raised from overstatement action of Tesco and also help in determining the reason behind such account overstatement.
The accounting representation has permitted this overstatement incident to take place because of accounting principles and policies which allows the company to show a high profit and less cost in their accounting records.
In today’s business environment, the accounting knowledge is very important for the companies for sustaining in the competitive environment successfully and efficiently (Agbejule, 2011). The accounting representation involves accounting department in which accountant and auditors are responsible to maintain proper records and summarize and present the financial data in accounting statement efficiently.
In the views of Barton (2011) accounting policy and concepts creates a huge influence over the financial statements and reporting of data to some extent as this policy allows to make some changes which are beneficial and necessary for the company performance and stability in complicated and challenging business environment.
From the given case study, it is determined that Tesco is UK based largest retail organization which shown overstatement of the profit by £250 million in the half first year 2014 (Tesco Plc., 2015). In context to this, the main reason behind this overstatement incident is a delay in the accrual cost and income in the UK commercial market.
In addition, this news also affected the Tesco market share price in the London Stock Exchange which is decreased significantly due to which company faced a big loss in the capital market (Corbet and McMullan, 2018). In this, a capital market of the company is evaluated from which it is identified that capital market has decreased by £2.2 billion (Tesco Plc., 2015).
However, this overstatement incident is usually taken place by the company for showing the best financial growth and stability of the business in the competitive environment. The accounting policy allows the overstatement or understatement of financial information because this helps the companies to get protected from the uncertain and risky situation.
In other words, Dechow et al. (2011) also mentioned that accounting policies are used by the companies for playing a safe game in the competitive environment for achieving the long-term sustainability successfully.
In the research study of Ettredge et al. (2012) clearly stated that overstatement and understatement of the accounting books are shown when the company wants to hide its actual market position and stability similarly like, Tesco.
This change in the accounting statement or information is dome easily on the basis of accounting policies and procedure which is adopted by the company for achieving the competitive edge and also for showing a fair image to company’s stakeholders. Further, Leuz and Wysocki (2016) also explained that financial statement can be used objectively for representing the economic reality to some extent because company performance and growth in the competitive market also creates impact or influence over the economy condition.
The stakeholders of the company such as customers, shareholders, suppliers, etc are more focused and keen to analysis the relevancy and accuracy of financial data as well as economic reality in order to make an important investment or business decisions and strategies.
In contrast to this, Kukreja and Gupta (2016) also argued that financial statement lack in representing the clear picture of the economic realities because economy growth is not dependent fully on company’s performance in the global market.
In the company’s growth and development, economy growth and support play a crucial role in operating and expanding the business in the global market successfully.
Moreover, Power (2010) also explained that financial information in the accounting system is based on assumption and subjective judgment in which valid description is provided of economic reality which is actually influenced by different external factors such as political, social, cultural, technological, economical and so on.
The financial information provided on assumption basis is not readily accepted by other stakeholders of the company mainly suppliers. In support of this, Wan Mohammad et al. (2018) also elaborated that accounting statement of business cannot be used objectively for representing the economic reality. But on the other side, the reliability of financial data is evaluated on the basis of future economic phenomena and that also helps in predicting the sense of faithfulness.
The accounting relationships at the time when this overstatement incident of Tesco happened found to be not stable. It is also identified that there was a time when Tesco was the leading retail business leader in the UK competitive retail market. In recent years, it is also identified that Tesco has lacked by the big industry management turmoil and swift and this result into the decline in the market share of the company Tesco.
In the same concern of this, Jack et al. (2018) also mentioned that when there is a situation of understatement and overstatement of the accounts books then there are questions raised on the reliability and control system and accountability.
While analyzing the case study, it is found that Tesco annual report revealed the error in the accounting statement in respect to an overstatement of profit by £250 million in the half ending year in August 2014 (Tesco Plc, 2015). From the analysis, it can be stated that on a frequent basis, Tesco accounting relationship and performance is declining to a large extent and that is affecting the goodwill and reputation of the company.
On the other side, when this incident actually happened at the time board of director of Tesco appointed Deloitte for immediately carrying out an independent investigation on the annual statement a commercial income in the UK.
In the investigation, Deloitte found that amount of income has pulled up and accrual cost is not mentioned by the company in the financial records. This accounting system was found to be against in nature for the Tesco accounting policies (Hills and Anjali, 2017).
In order to deal with this situation, a board of director of Tesco main priorities to focus on two main areas i.e., existing incident should not happen again in future and ensure that all accounting records result should be relevant and accurate and must also result into developing an effective relationship with the suppliers. Moreover, a chief executive officer also passed guidelines and steps that need to carry out by the finance department in the organization.
Thus, it can also be stated that Tesco board manages to maintain the accounting relationships after the overstatement incident.
While analyzing the Tesco annual report, it is found that the financial manager and auditor of the company are responsible or accountable for the overstatement incident. This issue of the company in form of several questions was faced because of the negligence of the auditor and finance manager (Tesco Plc., 2015). In addition, it is also recoded that commercial income number is usually presented high from last many years in the UK.
Because of that, the situation of overstatement was permitted by the finance manger in the organization. However, it is also identified that finance manager allowed overstatement to be showed in the financial accounts with the aim to present the company with better financial stability and effective business performance.
This overstatement practices also helped the company to attract a large number of investors to invest in the business and this found to be beneficial for the company to some extent. In a similar manner, this incident is also reflected in the case study of Tesco where it is identified that Tesco hasn’t earned much in the financial year 2014-15 due to which company took this irrelevant decision for the company benefit (Tesco Plc., 2015).
From the case, it is also identified that the finance department of Tesco highlights high profit in the half ending the year 2014 in order to attract investors for more investments in the business for growth and development (Chwastiak and Young, 2003). Usually, it is seen that investors make their important investment decision on the basis of financial performance by analyzing the financial records disclosed by the company.
From the study, it is also understood that company was just indicating the income rather than showing the commercial cost. But at the same time, Wüstemann andWüstemann (2010) also stated that accounting system in the company should be followed in a systematic manner as it helps in maintaining a discipline in the accounting in different aspects such as human society, influencing of human behavior and decision making.
The accounting practices are performed on the basis of human aspects instead of using a natural science. However, these false accounting practices followed by the company create a situation of an overstatement when it presents the poor accounting system of Tesco.
Scott (2015) illustrated that accounting system is adopted by the company efficiently in order to avoid any future uncertainty or risk on the basis of economic concepts, theories and methodologies. The accounting is considered as a technical system for the accountability as this system help in recording each and every transaction in the financial statement of the company.
As per accounting standards, it is considered that this overstatement is an illegal practice which misguides the general public by showing the irrelevant or inaccurate data or figures (Fridson and Alvarez, 2011). In respect to this, Tesco needs to reset or recreate its financial accounting system so that public and investor loyalty or faith can be developed again towards the company.
In the context of Tesco, risk management approaches are needful for the organization to maintain the risk and convert it into future opportunities. According to Tesco, it had to face overstatement of profit by £ 250 million for a half year.
This condition of Tesco is an example and forced the Tesco as well as other organizations to use appropriate risk management approaches so that risk can be reduced and ignored by the effective way (Lueg and Knapik, 2016). There are different types of risk management approaches that are used by different organizations so risk can be managed. A five-step risk management approach is given below:
Step 1 Identify the risk
This step is an essential step in risk management approach. Under this step, organizations identify the risk which might impact the outcomes or the results. By measuring all the organizational factors, it is identified that which factor is responsible to occur the risk and what kind of risk would be.
Step 2 Analyzing the risk
After identifying the risk, it is important for the organization to analyze it by determining the consequences of each risk. In order to this step, an appropriate understanding is developed about the nature of risk and its impact on the organizational operations (Petersen et al., 2015). Under this step, it is analyzed by the organization that how much the impact of risk would be.
Step 3 Evaluation of the risk
The process of evaluating the risk is done under this step. The risk can be mitigated, accepted or transferred, it is evaluated under the 3rd step of risk management approach.
Step 4 treatment of the risk
This step is referred as a risk response planning. Under this step, the higher ranked risk is assessed and plan for treating it so that the risk can be reduced and maximize the profitability.
Step 5 Monitoring and reviewing the risk
The fifth step is taken to ensure about the risk that it has been treated with effective manner. The process of monitoring and reviewing the risk is done by the experts.
Hence, these five steps of risk management approach play an important role in process of minimizing the risk and turn its impacts into profitable results (Gurd and Helliar, 2017). According to the 2014’s incident of Tesco, it needs an appropriate risk management approach so it can recover its share prices and reduce the future risk which can be occurred due to different factors.
As per report study, Tesco is a largest retail brand in the UK and it has 2318 retail stores across the world. According to its business size, it can be concluded that Tesco needs an effective and strategic risk management approach.
The risk depends on the size of a business and the numbers of operations that are held in the organizations (Aivazidou et al., 2015). Above discussed risk management approach will help the Tesco to analyze and identify the risk within the organization and its further steps will help to finalize that how the risk should be treated so that risk would be reduced and the profit would be maximized.
Apart from this, it is essential for Tesco to maintain its image among the customers by reducing every kind of risk which can affect its brand name. It also needs to focus on all categories of risks like operational risk, financial risk, strategic risk, environmental risk, political risk and so on (Gold et al., 2015).
Additionally, it should focus on different control systems like diagnostic control, boundary control, belief control and internal control as well.
From the above study, it can be concluded easily that accounting representation plays a significant role for the company in order to capture the large market segment. The accounting benefits can be achieved by the organization only if accounting concepts and policy is implemented in a rightful manner. In a similar manner, Tesco also faced issues related to overstatement of accounts in the year 2014 and that lead to a decrease in the share prices of the Tesco in the competitive market.
On the other side, accounting relationship of Tesco also raised a problem as its income was more than the cost even then also company was facing loss from last few years. In respect to this, Tesco Company takes some necessary steps such as developing a new management policy, providing timely training to employees so that relationship with suppliers can be improved.
Thus, it can be summarized that Tesco should prioritize these areas for avoiding the issues related to overstatement of accounts in future by using risk mitigation control system which will be well-suited for Tesco or other organization too.
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