It may be more than two years on since it was first revealed that Tesco had overstated its guidance for half-year profits by £250m in 2014, but the ramifications are still present today. The British supermarket is facing up to a claim of more than £100 million in damages by a group of investors who say they lost millions in the aftermath of such revelations. This grave misjudgement and error and continuing consequences is a lesson that other companies can learn from when going about their own business.
The financial risks
Tesco was undoubtedly under pressure for such an error to occur. By making their profits look higher it should have pleased investors, enticed more and boosted the business as a whole. Instead, the overstating of its profits looks to have brought about more financial risks, not least the possible loss of £100 million from the investors’ claim. The loss of investment in the aftermath of the accountancy errors suggests that it wasn’t worth taking the risk in overstating profits in the first place.
As well as financial damage, Tesco’s reputation suffered too. Trust is a key part of any consumer relationship, and Tesco lost some of this when the errors were revealed, which impacted upon its sales. Keeping finances transparent holds more benefits than risks, which can be found out about here. So much so that some experts believe it could take Tesco around three to five years before it can fully recover, possibly trading at zero profit for a certain period of time. Financial damage is a lot easier to repair than reputational.
Stocks and shares performance
Not just in the supermarket but on the stock markets Tesco suffered. Various financial experts were shocked by the news of the accountancy error, with claims that this wasn’t the action expected from a FTSE 100 company. This was just further evidence that attempting to make profits look better than they are for a business could come back to bite the company later, whereas more transparency would have been better.
Continuing market risks
Tesco’s accountancy errors are a sign that something could be wrong with the business but also that there remain a lot of high risks in the markets if such a huge company must exaggerate its profits. Small businesses should take this as a warning, not only to keep its finances transparent and remain honest with its customers, but that taking such risks can backfire and make things worse.