Fraud at Tesco

As the Financial Conduct Authority announces its investigation into the affairs of Tesco, questions about how and why the Company overstated its profits earlier this year are rife. Until the outcomes of the investigation are known, the answers are speculative. Regardless of whether or not that understatement was intentional and if so, the extent to which senior executives were complicit, the damage has and continues to be done to the Company. Its value has fallen by £150bn since this issue came to light. News that the Financial Conduct Authority is to investigate Tesco over this incident wiped another 5.5p off the share value as soon as trading opened. In the fiercely competitive world of food retailing, its competitors must be rubbing their hands as a major competitor struggles. Or are they? Perhaps this will focus their own minds on the accounting practices that exist within their own companies having seen the damage that can be caused if it goes array. If it doesn’t – then they could suffer the same fate, as this is a real risk and any company that fails to learn, learns to fail.

In the first instance this is a failure of risk management – hindsight is a wonderful thing possessed by all of us. Foresight is the gift of good executives and managers who use every tool at their disposal to consider what the threats are to the organisation and put plans in place to mitigate against them. Didn’t see this coming might be the plea. Well look around. There have been numerous episodes in the recent past when the actions or inactions of people in organisations have had serious consequences. In a sector where public confidence and loyalty are vital, arrogance and ignorance must be avoided in equal measure.

Has someone set out to deceive in this case? Deliberately misleading shareholders, auditors, regulators and customers is a ‘lie’ in any language. If deception is proven in this case, committing that deception to print is a commissioned lie and indefensible. At what point in the Tesco risk and financial management systems should this have been identified? It is hard to imagine that a company the size of Tesco doesn’t have comprehensive systems in place - but still this issue occurred.

Sex, drugs, corruption, and illegal/inappropriate sexual behaviour by senior executives have all been played out in the media in recent years. Do they appear in the risk management matrices of major corporations? Who knows? If they don’t then they should and so too should the control measures to reduce their likelihood and impact. Knowing who works for you and what their relevant characteristics and behavioural traits are is therefore essential, along with any previous indiscretions that may have slipped under the normal screening radar.

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Risk Appetite

We all have a propensity to take risk; managing hazards on a daily base is something we all do simply evidenced by the fact that we get out of bed, leave the house, drive, walk, interact with people we don’t know - it is hard wired within us in order survive whatever life throws at us. Some of us will inherently avoid risk whilst other seek it out – governed by their ‘risk appetite’. That is why so few of the world’s population skydive, bungee jump or play the stock market. Different things both internal and external influence our risk raking behaviour.

The Financial Conduct Authority requires financial advisors to assess the risk appetite of clients before selecting products for them. For those who have experienced it, the quality and depth of that assessment is varied, and whether or not it is robust or has rigor, is debatable. After all, financial advisors are not trained psychologists and there is a degree of subjectivity in all risk assessment processes!

A key element of the relationship between the advisor and investor is trust. For many investors, there will be insufficient engagement with an advisor over time to build a relationship within which familiarity and trust develop in any meaningful way. As the saying goes – “trust takes years to develop and seconds to destroy”. One should never forget that the financial advisor is in essence a salesman, making a living out of the commission on product sales. The more they sell, the wealthier they become and whilst there may be a world of difference between a mortgage broker and a hedge fund manager both are inevitably taking risk with other people’s money. Jordan Belfort’s own view that his “debauched life of sex and drugs was ‘even worse’ than shown in the film “Wolf of Wall Street”. To what extent does reward-driven financial risk taking become more than just a way of life – an addiction – the thrill associated with higher risk higher reward? A legitimate question therefore is, who assesses and controls the risk appetite of financial advisors and how can those who manage and regulate them demonstrate their trustworthiness to the client or investor?

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