Leader: Tesco’s woes sees ‘materiality’ question raised

SOME 36 HOURS after Tesco’s trading update, and the key fact provided in those words to the stock exchange – that its profit overstatements stretch back at least two years, has left us with more to ponder.

Some issues remain the same. How has the governance and culture at Tesco allowed such an occurrence of what is, at the very least, aggressive accounting to take place, still needs to be resolved. The role of auditors PwC in this debacle requires clarification. We await the facts to be ascertained of the acts of the eight suspended Tesco executives.

But what also needs to be broached is the ‘materiality’ question. While the various restatements, in isolation, are unlikely to be classed as a ‘material’ matter that requires flagging up by an auditor, we have reached a point where the black hole is front page news – and seems to encapsulate Tesco’s various woes.

We don’t know, of course, whether PwC were even aware of the accounting practices that seem to have allegedly been employed by a few staff. If not, then materiality is immaterial as far as trying to stop the Tesco debacle happening again.

But, putting that to one side, materiality as a discussion point is apt. A numerical cut-off point for materiality seems a strange concept if disassociated with the risks a business has taken – we need assurance that the financial materiality threshold works in tandem with broader risk-gauging.

Whether the materiality issue does apply to Tesco is unknown. But it is likely to continue to be talked about, with more navel-gazing ahead for the profession.

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  • Jane Fuller

    You are right. The materiality screen should not be numerical. A much better principle is that the activity, or approach, would move the share price if revealed. Early booking of rebates clearly falls into this category. This is especially so since Tesco’s relationship with its suppliers has always been ‘interesting’ from an accounting point of view – its tardiness in paying them has been a handy source of working capital for Tesco, but not so nice for the little guys on the other end.
    Jane Fuller