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The Co-operative Group: Financial Auditing Analysis

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Published: Tue, 24 Apr 2018

  • Pak Liu

Background knowledge, evolution from origin and ethical issues

Ever since the establishment of the Rochdale Society of Equitable Pioneers in 1844 together with the subsequent major merger incurred within its expansion period during 2000 to 2012. The Co-operative Group, colloquially known as the Co-op, has been burgeoning for the last 17 decades, contingent upon the Rochdale principle which espouses dividend returns to members. Pending between its 172-years life up till now, it had metamorphosed the core business from a solely wholesale operation to an 85%-engrossing food retail within the conglomerate; affiliating no longer with just the struggling lower income groups, but the more prosperous middle class.

The sagacious quality possessed by previous chief directors to overlook the impact initiated by multiple-grocers buy to the retail market in the 1940s, in corporation with numerous business disposals and replacements, set cornerstones for the introduction of the Co-op brand in 2007. It has effortlessly entitled itself as the largest consumer co-operative in the UK. The business’s long-term economic scale, involving over 70,000 employees across the wide geographical spread of 4,500 locations within the UK, is sustained by the 8 million members who are democratically engaged in determining the co-operative’s operational strategies via voting.

Quoted from Co-op’s annual report in 2007, ‘Voting for corporate members is in proportion to trade with the society. Each individual member has one vote in the appropriate region of the society and each region has voting rights calculated on the same basis as a corporate member.’ Historically, the merger with UK’s second largest co-operative, the United Co-operatives on 16th February 2007 was concurred by the majority. The degree of influence members that is delegated can sometimes protract the implementation of proposals such as the Policy and Programme for Post War Development, published by the Co-operative Wholesale Society in 1944. In the meantime, members’ loyalty is bolstered through the incentivised dividend scheme; in the last quarter of 2016, approximately 15 million pounds were returned to members. However, potential member outflow is expected during the year of 2017, since the Group is unable to pay dividend until 2018.

Even though the food retailing business is presently the largest division of the group, nevertheless its profitability and market share dwindled between the 1970s and 1980s, partially but prominently because of inflation leading to more affordable importations. Conjointly due to the inefficient national distribution network in the early 20th century, the Coventry National Contribution Centre is now served as the solution to which; resulting a huge preconceived transportation cost which discouraged purchases. It was further exacerbated by the paucity of preparations to accustom its shifted association with the middle-class customers.

Inferior to externality, redevelopment projects during the 1970s devastated 18,000 stores to be closed since employees were moved from terraces to purpose-built estates, so a redundant provision of co-op stores was observed in certain areas. Until 2015, the Group had converted their focus on the 2,500 convenience stores; an extraneous 200 convenience stores were added to the fixed asset account utilising the fund from liquidating 100 supermarkets.

The remaining 25% of the business is encompassed with sectors concerning funeral-care, banking, legal service, electrical products sale and joint-ventures such as insurance service and travel agency.

An excessive 900 funeral homes, whilst some continue to use their own brands, had contributed a revenue of £399 million in 2015 and positioned the funeral-care sector as the largest funeral director in the UK. During Co-op’s expansion period, the funeral-care sector was appraised to have optimistic performance abreast with the Co-operative Pharmacy, which was soaring to become the third largest pharmacy group in the UK. Unfortunately, the investigation stretching back to 2008 exposing the £1.5 billion capital blackhole in the Co-operative Bank’s account had arose a financial crisis in years of 2013 and 2014 for the Group. In purpose to reduce its debt level, the entire 800 Co-operative Pharmacy branches were sold to the Bestway Group for a substantial £620 million. Other former businesses underwent disposal, serving to either minimise debt level or simply eliminate non-profitable divisions include the milk processing and distribution division Associated Co-operative Creameries (ACC) and the Co-operative Motor Group. Until recently, the Co-operative Travel also announced the intention to sell its 30% stake in the joint venture with Thomas Cook, putting the 100-years trade to an end.

Barry Tootell’s scandal, resigned Bank’s executive, of failing to exercise ‘due skill, care and diligence in managing the firm’ was calamitous to Co-op’s reputation, which was once sabotaged because 38 Co-op stores in Sussex disappointed the fire safety requirements in 2007. From attempting to restore its long-established ethical image to becoming a Fairtrade champion, many initiatives have been commencing including providing nutritional information on Co-op’s branded food, environmentally friendly household products productions, raising awareness of animal welfare standards and investment into generating renewable energy. Whereas the partnership between Miles Smith and the Co-operative Insurance will be continued.

On the other hand, the national legal service provider founded in Bristol in 2006, furnishes a broad coverage of services straddling domestic and matrimonial law, testamentary constitution and related probate and conveyancing, as well as employment law and personal injury. Meanwhile, the Co-op Electrical is the pioneer in selling extended warranty insurance products at cost price. It also offers delivery service with a guaranteed timeslot of 60 minutes, confirmed on the day of delivery via SMS.

KPMG had been the Co-operative Group’s auditor for the previous 40 years until 2015. A profuse amount of audit fee of £700,000 was paid, excluding the extraneous £1.2 million consulting fee which involves a particular £500,000 for tax planning.


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