The Role of Sarbanes Oxley Act in Curbing Corporate Fraud Essay

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Tesco’s Fraud in the Accounting Information System

The Accounting Information Systems (AIS) plays a central part in the business computing structure of any organization. AIS deals with the classification, collection, storage, monitoring, and conversion of the company’s data into information utilized for internal control and reporting (Smith, 2016). Once an organization adopts an Accounting Information System, they can keep accurate records, and manage the assets of the organizations properly. The management utilizes AIS to guarantee that there are suitable access and separation of duty controls. With such restrictions, the administration can hold the employees responsible for their interaction with the system. This paper delves into how the components and functions of Tesco’s accounting information system contributed to the 2014 fraud scandal.

Tesco’s Fraud Scandal

Tesco is popular grocery retailer with its head office in Welwyn Garden City, Hertfordshire, U.K. (Colson, 2017). Globally, it is ranked at position nine regarding revenues and third position regarding profits. It is the leading grocery store in the U.K and has outlets in 12 nations across Europe and Asia. In 2017, Tesco’s store portfolio included Tesco Extra, Superstores, Express, Metro, One Stop, online Stores as well as Petrol Stations (Colson, 2017). With some growth in budget rivals and the reduced non-food spending from consumers, Tesco appeared to have lost appeal to some of its customers. The company’s shares even lost its value by 49 percent as it continued to struggle in the competitive market with rivals Lidi and Aldi (Colson, 2017).

Eight Tesco executives were suspended in October 2014 due to Fraud claims after the discovery was made on the company’s inflation of its profits by £250 million (Colson, 2017). Consequently, the stock market value of the company was reduced by £2.2 billion (Colson, 2017). Among the executive suspended were Chris Bush, the Managing Director in the United Kingdom and Kevin Grace, former director for commercials. Following an investigation by Deloitte, the accountancy firm, the exaggeration of the profit was reviewed up to £263 million (Colson, 2017). Moreover, Tesco failed to pay the suppliers to enhance its performance in sales and hence the inflated profit figure. It was also determined that the company encourage the suppliers to pay if they needed to have a better control of where their products were placed on the shelves or give them a competitive advantage over their main rivals (Colson, 2017). Furthermore, several days before their presentation of the company’s results, Tesco encouraged buyers to ask suppliers to agree to postponements in payments to make the figure representing the sales made look flattering.

In October 2014, a criminal investigation began as confirmed by the Serious Fraud Office (Colson, 2017). In the aftermath of the scandal, investors sued the company claiming that they lost significant amounts of money since they bought shares on misleading accounts basis. After the scandal broke, the company lost almost half of its value. John Scouler, Christopher Bush, and Carl Rogberg, who were the former commercial director for food, managing director, and finance director respectively, were accused of financial fraud while in their professional capacity which was considered abuse of office (Colson, 2017).

Failure of the Company’s AIS to Prevent the Fraud

The company’s management failed to maintain a system of internal controls to ensure reliable and accurate financial reporting. Ideally, after financial transactions are obtained aptly, they must be scrutinized for precision (Young, 2013). The cash receipts, cash disbursements, and job cost reports all must be revised to ascertain the accuracy of the quantities that the paperwork provides. If incorrect figures are forwarded into the Accounting Information System, accounts reconciliation should be done to detect errors in the financial transactions.

While financial transactions may satisfy the accounting needs of validity, precision, and timeliness, some companies like Tesco engage in fraud deliberately to uphold a company’s economic health. In as much as the AIS software was created to be computerized which makes it difficult to manipulate, such companies find a way to alter the system (Wells, 2017). Tesco possibly used special accounts to hide transactions or created separate entities to hide debts particularly considering they failed to pay the suppliers.

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Failure of Tesco’s internal controls included:

Segregation of Duties

The company had a limited number of employees working in the accounting department which resulted in combining all vital duties and delegating them to only a few of them (Wells, 2017). The management failed to segregate the duties properly and get an independent individual from out of the accounting department to check the reports without bias and maintain a strong control system.

Balance Account and Balance Sheet Reconciliations

Tesco failed at reconciling the balance accounts and balance sheets accurately. The company was under immense pressure to keep performing better and did not consider including proper auditing, as they knew their move would not pass muster with strict auditors. Tesco did not execute its financial reporting as per the established accounting principles regarding valuation, measurement, obligation, occurrence, existence, and completeness.

Supervisory Controls and Governance

During the proceedings, one of the executives stated that the financial misrepresentation had been going on for so long since Tesco was keen on covering the growing accounting gap in a short-term although they were well aware of possible future problems. The company created separate entities to hide its debts, and without proper governance and supervisory controls, the process went on for several years.

Accounting Information Systems

Tesco willfully manipulated the companies AIS to allow it to perform the accounting fraud. The accounting team was given the responsibility of concealing the useful information to make it look like the company was making a profit even when it was not (Wells, 2017). The team went ahead to falsify the figures in a practice that they knew was contrary to the proper accounting principles and standards. Chances are Tesco’s computer audit trail failed because there is no any other better way to explain how such transaction misrepresentations were missed.

Responsibilities and Risks regarding Third Party Accounting System

In the contemporary corporate environment, outsourcing is commonly practiced, and the situation in the accounting department is not any different (Young, 2013). Outsourcing is largely preferred because of the numerous advantages it presents including less expensive since the development and training costs are reduced, and the company does not have to deal with the accounting concerns (Wells, 2017). However, it is the company’s responsibility to guarantee accurate accounts and not shifting the burden to the service provider. Although the clerical tasks in outsourcing can be transferred, the management is still answerable.

While an outside organization has access to very confidential information, it does not have suitable internal controls (Young, 2013). Therefore, the service provider’s incompetency may produce fraud and material errors. Furthermore, when an outside company performs another company’s inside duties, it gets information about it that the party may use for its benefit, for instance, buying shares when the prices are projected to fail or rise. Outsourcing is also risky, particularly especially when the same company is contracted for both accounting and auditing purposes due to the possible conflict of interest (Wells, 2017). The independence of the auditing report will be compromised since the company will be more keen on projecting the performance in the best light possible. The ethical concerns in outsourcing the service provider relates to whether they have any other interest in the company. The company should always remember that while auditors have an opinion on the financial reports, it is not their responsibility to prevent or detect fraud within the company.

Prevention of Fraud

During the case, it was determined that Tesco has been preparing artificial financial records, book, and statements that were inaccurate and there was an absence of proper internal controls in the company through the years (Wells, 2017). The company deliberated created loopholes in the accounting….....

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Colson, T. (2017, October 4). ‘The whistle is about to blow’: Secret report exposed Tesco’s £250 million accounting scandal, court hears. Business Insider. Retrieved from
Smith, J.S. (2016). Accounting Information Systems: Ethics, Fraudulent Behavior, and Preventative Measures. University Honors Program Theses. 178
Wells, J. T. (2017). Corporate fraud handbook: Prevention and detection. John Wiley & Sons.
Young, M. R. (2013). Financial Fraud Prevention and Detection: Governance and Effective Practices. John Wiley & Sons.

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