Introduction

In present times, the subject of corporate governance is the most crucial one
and a large number of corporate scams have recently been reported. This is due to a
lack of attention paid by the board of directors, auditors and other regulatory bodies,
making it problematic for shareholders and stakeholders of a company to think
strategically for the betterment of the company. According to Bebchuk, Cohen and
Ferrell (2008, p.783), corporate governance is defined as the set of rules and
regulations and practices that can be implied on the company so as to control the
business operations. Corporate governance of a company is mainly concerned
with maintaining a balance between the company operations and interests of
stakeholders and shareholders of a company (Bhagat and Bolton, 2008, p.257).
However, there are recent additions in the corporate governance scams amongst which
the accounting scandal of Tesco PLC 2014-2015 is the most prominent one.
Aforementioned UK retailing business came under the regulatory scanner because of
the scandal of overstating the profits of the company; where nearly around £263 million
worth of profits were overstated (TheGuardian.com, 2014). This essay highlights the
lack of corporate governance while exploring major loop holes in the corporate structure
of the company which resulted in this major accounting scandal. A conclusion is
presented in the end while summarising major findings of the essay and effective
recommendations are presented in this essay for the companies to avoid such
corporate governance failures in future.

Discussion
Overview of the case
In the year 2014, Tesco, UK’s largest retailing giant, was plunged deeper into
the crises which resulted in the suspension of four senior executive directors of the
company. The suspension was followed by the scandal of overstating the company
profits by £250m (TheGuardian.com, 2014). Tesco had overstated the first-half profits of
the company to be £1.1bn, but later on, it was revealed that the company had
experienced a profit of £263m. This overstatement of the profits in the forecasted
profit figures was to attract shareholders and to increase investments and funds
to the retailer (FinancialTimes.com, 2014). After the accounting scandal in Tesco
PLC, the legal authorities and board of directors significantly took this matter under
consideration and wiped off £2bn of the net value from the UK’s biggest retailing
company. Following the accounting fraud, Tesco PLC was alleged to pay £500m fine by
the end of the year and more than 125 investors filed against the accounting fraud
made by Tesco PLC and claimed that the company had been lying to gain funds and
investments (TheTelegraph.co.uk, 2014).
Failure of Corporate Governance
Tesco PLC has been known for its corporate governance framework and its
commitment to the safety and ethics towards the environment as well as the people.
However, the accounting scandal of Tesco PLC in 2014 has reported being one of the
influential events that declined the overall reputation of the company. Because of this
corporate governance failure, several people of the company were suspended including
four executives as well that were engaged in the accounting fraud (Awolowo, 2016,
p.23). Moreover, the audit committee and company (Deloitte) were also reviewed
and brought under the consideration after the incident. The major corporate
governance failure, in this case, is because of the massive process failure of Tesco PLC.
More importantly, the resignation of Chief Finance Office just before the accounting
scandal brought the headlines left the company with no CFO (TheTelegraph.co.uk,
2014).
Additionally, the resignation of CFO followed with the resignation of several
other great senior executives which is the case of pure poor corporate governance. The
board of directors and the non-executive directors paid no attention to the inflated and
overstatement of profits to grab the attention from shareholders. Similarly, the external
audit committee, PwC and the internal audit committee of the company was
equally responsible for their lack of activeness in this matter. However, the EU
Audit Directive and Code of Ethics pose strong push on the internal audit committees of
the company, including their role on financing, reporting and disclosing of the honest
information to the shareholders and stakeholders of the company (Müller, 2015).
It is evident that the role of the board of directors to have vigilant
corporate governance is the prominent one which implies that in order to
establish excellent corporate governance, it is necessary that the company board
of directors are the key players in maintaining effective corporate governance
(Bhagat and Bolton, 2008). Board of directors of the company is responsible to
establish the key vision and mission of the company while setting strategies to
obtain a nominal position in the market (Woods, 2007). However, this is not in the
case of Tesco PLC. The board of directors was ignoring the Code of Ethics and EU
Audit Directives which led to the accounting fraud. Moreover, the board of directors of
the company failed to take strategic decisions and raise voice against the
irregularities while focused their recognition on revenue generation.
According to Ismail (2017), UK Code of Governance provide provisions for the
audit committees as well which ensures that the audit committee of the company is
responsible for maintaining integrity in the financial statements of the company, along
with reviewing the financial controls, judgments and operations of the company so as to
avoid the mishaps or misstatements in the financial statements. However, in the case of
Tesco PLC, the audit company of the company PwC paid no attention to the
misstatement hence this led to the removal of PwC from the external audit
committee of Tesco PLC (Müller, 2015). According to Courteau et al. (2017, p.1), the
internal and external audit committee of the company is responsible to manage the
financial activities such as reporting, external and internal audit, disclosure and
monitoring the regulatory operations of the financials of the company. However, the
audit committee of Tesco PLC has long been avoiding their responsibilities which
resulted in the accounting scandal of Tesco PLC in 2014. According to Kukreja and
Gupta (2016), the disqualification or resignation of the potential board members also
results in the failure of corporate governance. This may be in the case of Tesco PLC.
The accounting scandal in 2014 broke out soon before the resignation of the CFO of the
company and left Tesco with no supervision of CFO, however, the scandal led to the
dismissal of three responsible board members which included the chairman, Richard
Broadbent and CEO Phillip Clarke as well.
Corporate Governance – A theoretical perspective
In the light of stakeholder’s theory, corporate governance can be seen as the
collection of policies and principles that are necessary to maintain the morals and ethics
of conducting a business while values the stakeholders and their interests. According to
Courteau et al. (2017, p.1), stakeholders theory is known for its managerial side and
declares that the company and the board of directors are responsible to value the
interests of the stakeholders while valuing morals and ethics of conducting the business
(Alpaslan, Green and Mitroff, 2009). In the case of Tesco PLC, the company has failed
to value the stakeholders’ interests during the governance process. The board of
directors failed to value the interest of their shareholders while disclosing the fake
information and overstated the company profits to gain investments and profits from the
investors. Similarly, the company audit committee of Tesco PLC also paid no attention
to the values of its stakeholders which led to the fraud (TheGuardian.com, 2014).
Lessons Learned
The weak corporate governance structure of Tesco PLC and no attention to the
overstatement of profits results in such fraud which not only penalizes the company with
extra charges, but it also affects the overall market reputation of the company in the
eyes of the shareholders and customers. Because of the accounting fraud of Tesco
PLC, it has been evident that the internal and external board of directors of the
company are responsible to make strategic decisions for the avoidance of such mishaps
in the reporting or disclosure of financial statements (Kukreja and Gupta, 2016).
Moreover, it is also recommended that the company must be including effective
regulations and viable accounting practices so as to avoid such frauds. Similarly,
good leadership and governing practices should also be incorporated within the
corporate governance of the company in order to keep the employees on track to
meet organizational goals while meeting and valuing the stakeholders’ interests
and legal rights. If the corporate structure and board of directors of Tesco PLC could
have valued the stakeholders’ values and concerns while keeping the personal gains for
the company aside, the company might not have indulged in such serious accounting
fraud.

Conclusion
As a concluding statement, it has been observed that Tesco PLC has been
known for its misstatement of profits in accounting books to grab the attention and
investments of the shareholders to increase profits. This has occurred because of weak
corporate governance structure and lack of attention from the board of directors and
audit committee to this issue. Hence it can be recommended that the company should
have an effective corporate governance structure with the inclusion of Governance
Code provisions and potential board members in order to avoid such frauds and
scandals.