Tesco’s head of Group Food Sourcing (GFS) Matt Simister, the man ultimately responsible for all of the retailer’s direct procurement of fresh fruit and vegetables, is one of four senior executives to have been suspended by the group after it revealed that it had overstated its profit forecast for the second half of the year by an estimated £250m.
Also suspended by Tesco are the company’s UK managing director Chris Bush, its UK finance director Carl Rogberg and its UK commercial director for food John Scouler.
The issue appears to revolve around what’s known as recognition of commercial income, an area of focus flagged up to Tesco shareholders by independent auditor PwC in the group’s annual report for 2012/13.
Essentially, Tesco is known to retain a percentage of payments owed to certain suppliers and for a variety of reasons, money which at certain stages in its periodical accounting can be regarded as income, but which at other times may be recorded as a cost.
As such, the area is a reporting minefield for even expert accountants, one complicated by the fact that unpredictable factors can delay the transactions – for example, if a supplier raises a compliance issue and opts to withhold an agreed rebate.
While nothing has been confirmed by Tesco itself, the indications are that this commercial income – which includes money owed to suppliers for their goods but set aside for promotions, or indeed discounts and rebates granted by suppliers in return for Tesco buying their product – is at the centre of the profit overstatement, with the error potentially as simple as filing such income under the wrong half of the year.
However, it remains unclear whether or not contracts with fresh produce suppliers were involved in the error that prompted Simister’s suspension. GFS effectively operates as a separate commercial entity, managing contracts with suppliers and then passing on what it sources to more traditional buyer-merchandiser teams for sale across the wider Tesco group, but it is not yet known if this could have contributed to any confusion leading to the profits being overstated.
Mike Dennis, an analyst at Cantor, told the Financial Times his company had already raised concerns about overstating income from suppliers late last year in a comment piece titled ‘A desperate move?’ and a research note entitled ‘It’s just an illusion’.
“In both we questioned how Tesco was supporting 5.2 per cent UK trading margins with falling sales and rising costs,” he explained. “We believed Tesco had been overstating its UK commercial gross profit by £200m+ per annum via deducting monies from suppliers’ trading accounts or extending payment dates without notice.”
PwC’s warning earlier in the year now appears prescient: “We focused on this area because of the judgement required in accounting for the commercial income deals and the risk of manipulation of these balances.”
However, PwC’s assessment of how watertight Tesco’s reporting of commercial income really was seems to have been based on sampling a limited number of supplier contracts before reviewing historic margin data and then extrapolating, as opposed to a forensic look at the terms of each individual contract in order to calculate what could be regarded as income.
Simister, who has been in charge of GFS since April 2010, pioneered the retailer’s new international sourcing model for fresh produce over the past four years, more recently extending it to other areas of food and non-grocery.
From buying offices in Europe and Asia, the division has built up a network of sourcing hubs in different regions of the world to oversee delivery of fresh food and packaged own brands to Tesco stores in a number of different countries.