Tesco Shares / False Accounting.

poodle7

In light of the current Tesco News regarding the overstated half year profit of £250m.

What rights does a Tesco shareholder have if they purchased some Tesco shares during the companys false accounting period?

I look forward to hearing peoples thoughts on this.

Glen_Clark

'False accounting' is putting it a bit strong. Supermarkets receive payments from suppliers if they hit sales targets (as an incentive to stock or promote their goods)
It seems Tesco, whose falling sales makes these targets harder to achieve, has over estimated payments its likely to receive in the future.
These interim accounts are not audited, and PWC noted these payments to be 'an area of focus' when they signed off the annual accounts in May.
Its debateable whether this is an over optimistic estimate or a fraud, and has happened before with other retailers like Safeway and Wickes (where nobody was successfully prosecuted), but it seems the new boss is keen to get all the bad news out before he starts, so that it will look as though he has done a better job.
Were you thinking of suing somebody?.

gkerr4

i agree with Glen - and to answer your question - shareholders have 'no' rights.

look at enron - that was a genuine case of accounting malpractice - company folded - shareholders lost the lot.

one of the risks i'm afraid.

Glen_Clark

The nearest precedent i can think of at the moment is probably Safeway. After taking it over, Morrisons discovered similar over optimistic estimates in the accounts, and Morrisons share price dropped. But there were no prosecutions or compensation for anyone.
As I recall, Dixons was to do with over estimating the profit they would get from warranties they had sold, by under estimating their liability for repairs and replacement of faulty or lost goods they had sold. All very difficult to prove any deliberate fraud, even more to extract compensation.

gkerr4

Glen_Clark wrote: »

The nearest precedent i can think of at the moment is probably Safeway. After taking it over, Morrisons discovered similar over optimistic estimates in the accounts, and Morrisons share price dropped. But there were no prosecutions or compensation for anyone.

i would suspect that "over generous" estimates would form part of many takeovers - the company to be taken over would either inflate earnings to 'prevent' a takeover (i.e. try and recover the share price) or simply to secure a better value for shareholders in the buy-out. We probably don't complain so vociferously in the latter example.

what goes around..

IronWolf

gkerr4 wrote: »

i agree with Glen - and to answer your question - shareholders have 'no' rights.

look at enron - that was a genuine case of accounting malpractice - company folded - shareholders lost the lot.

one of the risks i'm afraid.

That's not true though, Enron shareholders filed a class action lawsuit against the company and directors, and got a $7.2bn settlement in 2006.

Similar class action lawsuits have been filed and settled against Worldcom and other frauds.

If the case is outright fraud then you can usually get a settlement, the trouble is that accounting assumptions are open to interpretation and just because you disagree with assumptions used by previous management doesn't mean they were fraudulent.

atush

Sell or buy more are your options.

Even if fraud is found (and that is not a certainty) then you would still get nothing but a lower SP and lower divs paying off the fines.

gkerr4

IronWolf wrote: »

That's not true though, Enron shareholders filed a class action lawsuit against the company and directors, and got a $7.2bn settlement in 2006.

Similar class action lawsuits have been filed and settled against Worldcom and other frauds.

If the case is outright fraud then you can usually get a settlement, the trouble is that accounting assumptions are open to interpretation and just because you disagree with assumptions used by previous management doesn't mean they were fraudulent.

that is true - but we (the UK) are much less driven by or experienced in class-action legal matters. I would suspect this would be unlikely to happen in the uk and even if it did, the settlement would be drawn out and agreed on a very long timescale.

to all intents, you've just 'lost' your shares in a case like this.

poodle7

It will be interesting to see what the investigation throws up. Im guessing it will be a lot more than we know at the moment.

Depending on what the investigation uncovers and the scale of accounting discrepancies. Surely shareholders may find they will be in good a position to file a lawsuit against the company, its directors and company auditors who were involved in exaggerating the profits.

Breaking the accounting rules to exaggerate company profits would encourage more shareholders to buy into something that actually wasnt there. This spells disaster when the share holders find out.

It will clearly be worth watching how this unfolds.

jimjames

gkerr4 wrote: »

i agree with Glen - and to answer your question - shareholders have 'no' rights.

look at enron - that was a genuine case of accounting malpractice - company folded - shareholders lost the lot.

one of the risks i'm afraid.

Another case rumbling on at the moment is HP vs Autonomy with HP claiming that previous directors inflated figures to give higher profit than was achieved.

Still at the accusation stage though.

bowlhead99

poodle7 wrote: »

In light of the current Tesco News regarding the overstated half year profit of £250m.

What rights does a Tesco shareholder have if they purchased some Tesco shares during the companys false accounting period?

I look forward to hearing peoples thoughts on this.

You have the right to sack the entire board of directors and replace them. They are appointed as your stewards and have a fiduciary duty to look after the assets and run the company on behalf of its owners, including yourself. If you don't like how they do it, you can vote alongside other investors and if on balance it is agreed that they are not considered to be the right people for the job, they will be gone.

That said, they don't seem to have lost any of their investors' assets. Merely, an estimate of how much profit they had made in the 6 months to 23 August, was inaccurate. Estimates given in trading statements may often be inaccurate as anyone who decides to buy shares in individual companies will be well aware.

As they mentioned in their note yesterday, the effect on their projection for the second half, or for the whole year, on which you might have been making your decision to invest, may be different to £250m because some of the 250 will be timing differences.

So for example if they said they would make £1100m in the first half and 2400m total, but they had overstated the first half by £250m and the full year by £150m, then the real numbers once the financial statements are published might be 850 H1 and 2250 total? Those real numbers would imply H2 performance of 1400 versus the estimates of 1300. 1400 is a larger absolute second half performance and a larger percentage increase over H1 from what was estimated. So bizarrely, despite a worse overall performance, some investors trying to judge the underlying trend of the turnaround might have been more likely to buy in with the real results that we'll find out next month, than with the error results. So it is very difficult to prove that you have accidentally bought in to the company on duff information during the the four weeks between statements.

All businesses make estimates and forward looking statements within their news releases. In the unaudited trading statement in August they don't even tell you about their balance sheet, they are just giving you some general guidance to what has happened overall in the P&L and what might happen going forward, with uncertainty written all over it.

The business continues to face a number of uncertainties, including market conditions and the pace at which benefits from the investments we are making flow through in the second half and consequently the Board has revised its outlook for the full year. We now expect trading profit for 2014/15 to be in the range of £2.4bn to £2.5bn. Trading profit for the six months ending 23 August 2014 is expected to be in the region of £1.1bn.

So, while it is disappointing that the accounting techniques driving the estimates and their personal expectations are now not considered to present a fair view, it is not like they were guaranteeing that they had delivered £1.1bn or would deliver £2.45bn for the whole year.

So, when you decide to go and spend a couple of pounds on an ownership slice of one eight billionth of Tesco plc, it is very much "Caveat Emptor".

At a share price of £1.95, they have fallen 15% or 35p from immediately prior to the announcement. That's getting on for £3bn off the value of the company, over 11x the value of the error. Obviously if the company is literally expected to be making £250m less every half year from now on into infinity, then you might expect the valuation to drop by more than 10x the amount - maybe by 20 or even 30x that £250m figure. However, it remains to be seen whether that is really the case. If much of it is timing difference it might not be anything like as much of a big deal as the worst case scenario and a valuation drop of over 10x the error could be very overblown.

Really the price moves are not so much a direct reflection of the actual pounds involved in the overstatement, but just a general credibility issue which can be turned around over the next decade. Some investors will only be buying in for a holding period lasting a few years, months, weeks, days, or seconds. Others like many here, are in for the medium or long term. Buying Tesco at £1.95 this month or £2.30 last month could still be a good thing to do long term, notwithstanding the fact that there are other businesses where the short- to medium-term prospects are perhaps more easy to assess.