The Groceries Code: Forensic Auditing Best Practice is a major step forward

For years, the Groceries Code Adjudicator’s office has been wrestling with the issue of forensic auditing of supply deals by retailers. It took a further step forward with the publication of agreed best practice on 30 September 2021. 

Supply deals with supermarkets are a complicated business. It is not simply a case of agreeing a sale price, supplying the products and the supplier waiting for the cheque to arrive. Retailers and suppliers will agree to build in promotional mechanics that might involve the payment of additional fees by the supplier, for example for special positioning in store or temporary price deals. Fees may vary depending on rate of sale over a period. Inevitably, there is an element of historical analysis required when looking at the variable elements of these deals and this has been the cause of friction between retailers and suppliers. 

In the past, retailers took advantage of the legal limitation period for claims and regularly investigated historical promotional activity from prior years (sometimes as far back as six years), claiming payments from suppliers on the basis of the reviewed sales data. Teams of auditors from external firms were engaged to pick apart the deals made, analyse the data and make claims on the suppliers. They were paid success fees based on the level of recovery from suppliers. Suppliers often found themselves unable to retrieve historical information or lacked resources to be able to devote management time to mounting a defence.

In 2016, Tesco was brought to task in a significant way by the Code Adjudicator following a report into its forensic auditing and a number of recommendations were issued to try and improve the situation for suppliers. Since then, the Code Adjudicator has issued several pieces of guidance on the Groceries Code and its implications for forensic auditing practices.

The best practice statement sets out six principles retailers will be expected to follow. One of the highlights for suppliers is the re-emphasis of previous guidance that retailers should not conflate the settlement of claims and counterclaims relating to historical issues with current or future trading. Coupled with the requirement that the investigation of historical claims should be a Finance function quite separate from the Buying team, this should go some way towards improving the feeling of suppliers that they need to cave into historical claims, no matter how unjustified, simply to maintain current relations.

Perhaps where the statement could have gone further from a suppliers’ perspective is in the remuneration of consultants. Retailers are asked just to consider if contingency fees remain appropriate and to review this annually. While the aggressive practices some suppliers have reported experiencing in the past may arise less frequently since the Tesco investigation in 2016, incentivisation of external consultants by results will be seen by many suppliers as a problem in itself. It will be interesting to see how the Code Adjudicator reports on the annual review of this practice by retailers. 

It is a major step forward both for retailers and suppliers to have a clearly stated set of principles they can point to when dealing with forensic auditing. It will always be an uncomfortable process for suppliers but the re-emphasis on transparency and fairness should provide a degree of reassurance.