Tesco has suspended the head of its UK business and called in independent accountants and lawyers to investigate after discovering that its guidance to the City overstated expected first-half profits by about £250m.
The supermarket group, led by chief executive Dave Lewis, has asked the accountancy firm Deloitte and legal advisers Freshfields to scrutinise the overestimate at its troubled UK food business. PwC are Tesco’s usual auditors. The retailer has also contacted the Financial Conduct Authority, the City’s chief regulator.
Tesco shares fell almost 8% on Monday morning to an 11-year low of 212p, making them the biggest faller in the FTSE 100 index and wiping £1.5bn off the retailer’s market value. More than £6bn has been wiped off share value since 21 July, when the previous chief executive, Phil Clark, was ousted.
On 29 August, Tesco told investors to expect profits of about £1.1bn for the six months to 23 August, down from £1.6bn a year earlier. However, the discovery of the overstatement of revenue paid to Tesco by its suppliers means the supermarket’s first-half profit will now almost halve to about £850m.
Lewis, who joined three weeks ago after 27 years at Unilever, said he had never seen revenue accounted for in this way. “Certainly not in my Unilever career,” he said.
Lewis said four top managers had stepped aside from their jobs while the investigation took place. Chris Bush, the company’s UK managing director, is understood to have been replaced by Robin Terrell, Tesco’s multichannel director.
The overstatement was discovered when a whistleblower alerted Tesco’s general counsel on Friday afternoon.
Lewis said the general counsel then informed him and Tesco spent the weekend scrutinising the food business. He said the problem was not in the ordinary course of events and that rules may have been broken.
“We have asked four people, senior people, to step aside. That is across commercial and business operations.
“We are clear there is an issue here. We will let the investigation determine whether any rules were broken and what I need to do to address that.”
Analysts pressed Tesco’s chairman, Sir Richard Broadbent, about how the accounting problem went undiscovered until just over a week before the planned announcement of first-half results. Clive Black, an analyst at Shore Capital, said Broadbent’s position was untenable because he had left the board without a finance director.
Tesco recruited Alan Stewart from Marks & Spencer as its new finance director in July, but he is not due to start until December. His predecessor, Laurie McIlwee, resigned and left the board in April, but agreed to stay on to hand over.
Black said: “It’s been a total failure of governance. The finance director announced he was going in April. For a period they’ve been rudderless in that respect.”
Broadbent said McIlwee had not been involved in “recent days and weeks” and that the finance operation had carried on effectively without him. He declined to say when McIlwee was last in the office.
He denied that the board should have been expected to spot the problem and said it had stepped up scrutiny of commercial revenue, including payments by suppliers for instore promotions. “At the end of last year after looking carefully at it, it was signed off by external auditors.”
While PwC remained Tesco’s auditor, Deloitte had been called in to make an independent judgment, he said.
The accounting problem has forced Tesco to delay its first-half results from 1 October to 23 October. It is the latest blow to Britain’s biggest supermarket group,.
Broadbent said Clarke was involved up until his last day on 1 September. Asked if the company will seek to reclaim bonuses from executives due to the overstatement, he said the board would take “all necessary actions”.
Last month, unveiling its second profit warning in two months, the retailer said it would be slashing its half-year dividend by 75% and that full-year profits would be £2.4bn to £2.5bn, down from its previous forecast of £2.8bn. Last year, the group posted profits of £3.3bn.
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