The Groceries Code Adjudicator intervenes on Tesco and tackles forensic accounting

02 October 2014

Just a week after Tesco announced it was carrying out an internal investigation into its financial reporting of its half-year results, Groceries Code Adjudicator (GCA) Christine Tacon said she has asked Tesco to examine its behaviour towards suppliers during the company's internal review.

Speaking to a groceries sector audience in Birmingham the Adjudicator said: "I have requested that compliance with the Groceries Supply Code of Practice (GSCOP) is included in the scope of the internal investigation and I have asked to be notified if Tesco starts to find practices which might breach the Code".

Forensic auditing

The Adjudicator also spoke of pushing forward on forensic audits.

Back in June (at the inaugural GSCOP conference) it was announced that eight of the 10 retailers regulated by GSCOP had agreed to volunteer to limit forensic audits to two years.

Forensic audits are where certain retailers seek to go back through up to six years of records to demonstrate they are owed money from suppliers. Suppliers complain that going back six years is onerous, especially given the complexity of how certain promotions and rebates are calculated.

GSCOP does not specifically regulate this practice but the Adjudicator has drawn the link between this practice and the obligation under GSCOP requiring retailers to not delay in making payments to their suppliers. The Adjudicator was keen to demonstrate that she could bring significant influence on grocery supply chain practice without actually carrying out full investigations and seeking fines.

This is a welcome step for many suppliers but also left many questions. What about existing forensic audits? Just what does two years mean? And what exceptions are there?

The Adjudicator has asked all the retailers to inform their suppliers this month (October) about their forensic auditing policies, which will hopefully provide some answers.

The Adjudicator has highlighted the need for suppliers and their trade associations to come forward with evidence of GSCOP breaches. In the GSCOP survey published earlier this year, 58% of suppliers said they did not raise GSCOP issues due to a fear of retribution from a retailer; there is still some way to go

Potential areas for attention by the Adjudicator

The Adjudicator has identified four areas for focus:

Drop and drive: delivery performance

What is the problem? There is sometimes a disparity between what suppliers say they have delivered and invoiced and what retailers say has been received. In some cases, retailers have made automatic deductions from invoices for alleged shortages. The Adjudicator considers that such practice falls under GSCOP as it potentially, in effect, delays payment.

What is being done? The Adjudicator has asked the retailers to provide an overview of their delivery practice and a sample review of the percentage of under-deliveries recorded at one of their distribution centres over a period of three months.

Forecasting/services levels

What is the problem? Concerns have been raised about the accuracy of retailers' forecasts and also how they can vary on short notice. Suppliers say this puts them in an impossible position - either carry excess stock to fulfil late changes to forecasts (with corresponding waste) or fail to fulfil and incur charges. The Adjudicator considers this is subject to GSCOP pointing to the general fair dealing duty as well as the more specific forecasting responsibilities.

What is being done? The Adjudicator has asked the retailers to review their forecasting practice and accuracy rate.

Request for lump sum payments

What is the problem? The Adjudicator has identified that some retailers request lump sum payments from suppliers such as supporting margin maintenance and joint business plans. Typically this happens at the end of the retailer's financial year. The Adjudicator points again to the fair dealing obligation under GSCOP as well as the obligation on a retailer to not vary a supply agreement unilaterally.

What is being done? The Adjudicator has asked the retailers to review their practice on lump sum payments and where such payments are included against a retailer commitment, they should be repaid to the supplier if the commitment has not been met.

Packaging and design charges

What is the problem? The Adjudicator is concerned that some charges applied for photography and packaging design may not be reasonable. The Adjudicator refers to the GSCOP obligation on retailers to:

  • not require a supplier to make any payment towards the retailer's marketing costs
  • not require the supplier to obtain any goods or services where the retailer obtains payment for such arrangement from a third party.

What is being done? The GCA has asked the retailers to consider if it was practicable to make a voluntary commitment that a supplier would only be charged for one redesign in any year with any subsequent changes paid for by the retailer.

Fines

Finally, the level of fine which the GCA can impose on retailers is still to be ratified by the Department for Business, Innovation and Skills.

For further detail on GSCOP, please see our previous article.


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