About 10 years ago the BBC ran an excellent drama series about fictional villain Harry Starks. He specialised in defrauding suppliers by using a ‘Long Firm’ – a technique based on the ‘Baby shark’ system perfected by Leo Albrecht, founder of Aldi. You establish a legitimate business, build up your supplier credit to say 30 days then sell the goods within 7 and use the spare 21 days to expand your business. Harry’s variation was to disappear after 29 days, taking the unsold goods with him to offload elsewhere. It was great TV.
A fair few suppliers to Tesco have been left feeling a bit like Harry’s victims – are we going to get paid and when? They could see they were being turned-over but virtually none spoke out for fear of losing their supply contract to the UK’s biggest retailer. It took the shock announcement of a £240 million ‘accounting discrepancy’ in Tesco’s accounts to open this can of worms some 12 months ago. The government Groceries Code Adjudicator, Christine Tacon has now published a damning 60-page report which catalogues the appalling treatment handed out to Tesco suppliers.
It all kicked-off when a whistleblower in Tesco’s finance department revealed how they were including so-called ‘commercial income’ from suppliers in the published results before they were received. This breach of accounting rules was somehow overlooked by longstanding auditors PriceWaterhouseCoopers and coincided with a crash in the share price and unexpected departure of Chief Executive Philip Clarke and Financial Director Laurie McIlwee. Under pressure from shareholders the Serious Fraud Office then opened an inquiry and the GCA likewise. The report gives a startling insight into the terms imposed upon suppliers in return for putting stock on the shelves. They included:
- CODBA: The ’Cost of Doing Business Allowance’ i.e. a contribution to building new or refitting stores
- The ‘’listing fee’ payable for establishing a new supplier account
- An ‘eye level fee’ for positioning products on the prime ‘eye level / buy level’ shelf
- Payment discounts in return for paying supplier invoices on time
- A ‘new store opening’ contribution or unspecified discounts to secure same.
Everyone in retailing has known for years this sort of thing goes on so the report came as no surprise. Unfortunately steely-eyed Christine can’t do anything but name and shame the company and put the frighteners on others – a bit like Harry Starks. The breaches of the GCA code of practice took place before it was given the power to fine anyone. However the Serious Fraud Office is another matter and is investigating an alleged attempt to manipulate the share price. Executives in public companies doing that are very naughty and can go to prison. Remember Gerald Ronson and Ernest Saunders who did porridge for boosting the Guinness share price to support a takeover bid?
If the SFO does successfully prosecute executives that is not the end of the matter. The company is now being pursued with so-called ‘class actions’ from institutional investors who bought shares at the top of the market and have since seen their investments halved in value. If they had the wool pulled over their eyes then specialist lawyers Bentham Europe will be looking for blood – preferably that of Clarke and McIlwee who between them trousered £2 million in bonuses after being suspended. BE have pointed out: ‘Investors have recourse under the Financial Services and Markets Act against Tesco following its misreporting of its commercial income in 2014. There is mounting public evidence that Tesco’s management were aware that the financial statements were untrue or misleading and claims against Tesco have a solid basis.’ Auditors PWC must also be looking over their shoulder and having interesting discussions with their professional indemnity insurers. Lots of lawyers are going to make lots of money out of this one.
The GCA has now been given some teeth but too late. Maybe Christine should be talking to Quantity Surveyors – the Gods of the building industry. The Employer is usually obliged to pay the main contractor on 14 days who then keeps his subcontractors dangling for up to 90. A good QS slips a subbie payment clause into the contract if he wants it to run smoothly.
Harry Starks was last seen sailing off in the sunset to start a new life in Morocco. I’ll bet there are a few who’d like to be doing that right now.