News

26 November 2014

David Corker’s article re Tesco and the SFO published in Corporate Dispute Resolution

Tesco’s travails and the SFO

What approach will the SFO take in the upcoming Tesco investigation? David Corker of Corker Binning discusses the future of the supermarket chain and the potential difficulties faced by the regulator.

In September 2014 Tesco revealed that it had overstated its profits by GBP 250 million and had instructed Deloitte and Freshfields to conduct an investigation into how its earlier financial statements had been so inaccurate. Last month the position worsened for the company in two respects; first it announced that the overstatement was in fact GBP 263 million and second, the Serious Fraud Office (SFO) announced that it had commenced an investigation into this accounting problem.

News of the SFO probe suggests that the Financial Conduct Authority (FCA) quickly decided that the problem was too serious to be dealt with as a regulatory failure by the company and also, that it had seen material which suggests that its employees may have acted dishonestly. Any hope that Tesco entertained that its publicly-announced internal investigation, carried out by Deloitte and Freshfields Bruckhaus Deringer, would keep the SFO at bay – and that its problem would soon come to be regarded as an embarrassing irregularity – has thus been dashed. It must now instead anticipate a lengthy criminal investigation with potentially dozens of its employees being interviewed, with potentially as many suspects.

The SFO’s intervention indicates that the status of this antecedent internal investigation is likely to have been the subject of intense attention by Tesco’s new management. The advent of this criminal phase means that its continuation would have been likely to have required an urgent board level decision. The extent to which the SFO has sought to exercise control and influence over the Tesco internal investigation is unclear. The SFO is always keen to secure first access for its team not only to the documents, but more importantly, to potential witnesses. However, in contrast to the duty of those in the regulated financial sector to co-operate with the FCA, there is no legal duty on a company to co-operate with the SFO. This fork in the road moment for Tesco is promising in that in recent months the SFO’s director, David Green QC, has expressed his views about companies under SFO investigation who seek leniency but only intend to co-operate with it, as covered by CDR recently. He has contended that corporate eligibility for something like a deferred prosecution agreement requires genuine assistance and concession; for example that no claims to legal privilege will be made in respect of the company’s lawyers’ notes of their witness interviews.

Faced with what must seem to Green an ideal fraud to investigate – potentially involving dishonesty by senior individuals within a major UK company – it is likely that if the internal investigation still continues then it does so only because Tesco has agreed to disclose the fruits of it to the SFO and to waive, at least partially, its legal privilege. If it has halted however, then this indicates that the company has decided to adopt a more robust stance and that for now it has not agreed to abandon all its defences and fully co-operate with the SFO. If it has adopted the latter stance then it would be imitating the approach taken by BAE Systems during its prolonged investigation for complicity in bribery.

If the SFO investigation did result in criminal charges against either the company or any of its employees based upon alleged false accounting practices, the difficulties for the SFO should not be under-estimated. It last ventured into this territory in 1998 at a time when it was anxious to burnish its reputation for being able to prosecute a big “City” fraud. This was the Wickes prosecution where four of that company’s (then) directors were accused of deceiving the auditors in relation to their alleged misrepresentation of supplier agreements. The issue in that case is reminiscent of, if not the same as, the one which appears in this one; how to account for up-front financial contributions made by suppliers in return for future guaranteed orders. Within Wickes its accounting practice concerning how these contributions should be recorded was euphemistically called “mortgaging the future”.

The problems which bedevilled the SFO Wickes prosecutions could easily reappear in any Tesco-related one. To get home on either a false accounting or a fraud by misrepresentation charge would almost inevitably involve heavy reliance on expert accountancy evidence. In Wickes the trial became a clash of competing professional opinions about the requirements and application of the international accounting standards required. Wickes sales and accounting employees’ had rather inelegantly described in emails what they thought they were doing in booking supplier contributions as current revenue, and not making a concomitant provision for future liabilities. However, the stumbling-block for the SFO was the innate uncertainty governing how and when this type of income should have been accounted for. After a lengthy eleven month trial in 2001, the jury acquitted all defendants after merely an hour’s deliberation.

David Corker specialises in acting for clients implicated in criminal or regulatory investigations, many of them international. He has many years’ experience of fraud, corruption cases and cartel investigations.

 

Read the original article on the CDR here.

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