Franchising, retail, business
01/10/2014
Supermarket says it has been notified watchdog has begun inquiry after admitting it had overestimated first-half profits
The UK’s top financial regulator has launched a full-scale investigation into the £250m accounting scandal that has plunged Tesco into crisis.
The Financial Conduct Authority (FCA) informed Tesco on Tuesday about the investigation, which will start by examining whether the company broke rules on accurate financial disclosure but it could widen to take in possible criminal misconduct.
The regulator has the power to prosecute people who make deliberately or recklessly misleading statements to the stock exchange. Tesco said last week that it was in contact with the FCA.
Tesco commissioned Deloitte, the accountants, and the law firm Freshfields to carry out an independent inquiry.
In a statement to the stock exchange, the UK’s biggest retailer said: “The Financial Conduct Authority has notified Tesco that it has commenced a full investigation following the overstatement of expected profit for the half year which was described in our announcement of 22 September 2014 and which is currently the subject of an independent review by Deloitte. Tesco will continue to cooperate fully with the FCA and other relevant authorities considering this matter.”
Last week, Tesco stunned investors by announcing that a whistleblower had alerted its most senior lawyer to over-optimistic accounting for payments from suppliers and business costs. The group admitted it had overstated its expected first-half profits by £250m. The statement came three weeks after a trading update that predicted first-half profit would be £1.1bn, down from £1.6bn a year earlier.
Tesco’s shares have fallen every day since last Monday’s announcement and have lost more than a fifth of their value in that time. They were down 3% at 179p in afternoon trading.
Sainsbury’s put further pressure on Tesco over the error by saying it was confident its own commercial revenues were properly recorded.
Sainsbury’s finance director John Rogers said: It was a “gross misrepresentation that this is a grey area of subjectivity. The accounting rules are clearly defined.”
The Financial Reporting Council, the accountancy watchdog, and the Serious Fraud Office are also monitoring events at the group.
Tesco’s new chief executive, Dave Lewis, suspended four senior managers, including the head of Tesco’s UK food business, when the accounting irregularity was discovered. After joining from Unilever at the start of last month he is battling to steady the giant retailer, which some analysts say is now too destabilised to invest in.
Shore Capital analyst Clive Black said: “Such an investigation (by the FCA) can only be another distraction for new CEO Dave Lewis and represents another black mark on the board.”
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