1.

There are number of reasons Tesco decided to manipulate their financial

statements:

 Tesco became increasingly aggressive in trying to meet its earnings

forecasts at a time when its profits were falling (it failed to capture US
markets). This aggressiveness may have encouraged unethical behaviour
by officials who were trying to meet targets.
 The performance of senior management was measured by meeting
targets and were highly incentivized. These compensation schemes may
have tempted managers to set unrealistic revenue and profit targets and
manipulate accounting to achieve results in line with market expectations.
 In 2014, Tesco ignored the warning about the recognition of commercial
income by its auditor (PwC). The perpetrator of the fraud as well as the
one who can prevent the fraud, knowingly does not take any action.
 While Tesco’s business was growing exponentially, its internal controls
were not. The management had substantial power to negotiate
commercial deals with suppliers without any oversight from the finance
department.
 Tesco saw a change in top management at the time when it had recorded
its first profit warning in 20 years. A change in top management at a time
when the company was facing challenges was a red flag.

Profit and Cash Flow

Profit means the revenue generated from the business after all the expenses have
been paid. The income statement shows the profit (or loss) incurred in a reporting
period.

Whereas

Cash flow refers to the net balance of cash moving in and out of the business at a
time. The cash flow statement represents the cash flow.

The companies’ performance can be compared from one year to another using the
income statement, but it cannot explain the reason for changes occurred. For that,
we need to refer the cash flow statement. Producing a cash flow explains why
business has made profit but still does not have cash at the bank or vice versa as it
is vital for the business to perform well at both fronts.

References:

Kukreja, Gagan & Gupta, Sanjay. (2016). Tesco Accounting Misstatements: Myopic
Ideologies Overshadowing Larger Organisational Interests. SDMIMD Journal of
Management. 7. 9. 10.18311/sdmimd/2016/8410.

Hontoir, J., Izhar, R. (2001) Accounting, Costing, and Management. United

Kingdom: Oxford University Press.
Many researchers (Wuerges and Borba, 2010; Kirkos et al. 2007; Beneish, 1999)
have explained that firms whose debt level is significantly high are more likely to act
illegally. Perols and Lougee (2011) and Kirkos et al. (2007) found that when the firm
has low liquidity, it engages in fraud in the financial statements. Therefore, to give a
good picture of the situation of the company, the leader overestimates the value of
the assets or liabilities as well as evaluates other liabilities incurred by the company.
This is reflected in the fact that a low-level of performance incites managers to
defraud for increasing their results, hide the problems and improve the overall
performance of the company. It should be noted that the lack of inadequacy of
internal controls, lack of supervision and lack of separation between the tasks are at
the origin of such opportunities.

Amara, I., Amar, A.B. and Jarboui, A., 2013. Detection of fraud in financial
statements: French companies as a case study. International Journal of Academic
Research in Accounting, Finance and Management Sciences, 3(3), pp.40-51.

Montesdeoca M.R., Monica, Sánchez Medina A.J., and Santana F.B. (2019).
Research Topics in Accounting Fraud in the 21st Century: A State of the
Art Sustainability 11, no. 6: 1570. https://doi.org/10.3390/su11061570