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Tesco cuts profit outlook again and suspends staff after accounting error

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[September 22, 2014]  By James Davey

LONDON (Reuters) - Tesco cut its profit forecast for the third time this year on Monday and suspended four members of staff after finding a fault in its accounts, another blow to the reputation of Britain's biggest grocer.

The company's shares fell 12 percent after Tesco said it had called in new accountants to investigate an error that forced it to cut its first-half profit outlook by 250 million pounds ($408.50 million). A profit warning on Aug. 29 had overstated expected first half profit by 23 percent, it said.

The error - caused by an early booking of revenue and delayed recognition of costs - had been discovered during preparation for its forthcoming interim results, Tesco said.

Their publication has now been pushed back from Oct.1 to Oct 23 by the firm's new chief executive Dave Lewis, who said on Monday that an "informed employee" had notified Tesco's legal team of the accounting issue on Friday.

Lewis told reporters four Tesco employees had been "asked to step aside" while investigations continue, but had not been disciplined. He said it was too soon to say whether this was a case of fraud.

The BBC and Sky News reported that Chris Bush, the managing director of Tesco's UK business, was one of the four.

Lewis declined to comment on Bush but said Robin Terrell, the firm's multi-channel director, had stepped in to run the UK business.

"We have uncovered a serious issue and have responded accordingly. The chairman and I have acted quickly to establish a comprehensive independent investigation," he said.

"The board, my colleagues, our customers and I expect Tesco to operate with integrity and transparency and we will take decisive action as the results of the investigation become clear."

Shore Capital analyst Clive Black said he was "flabbergasted" by the latest development and was reviewing his current recommendation to hold the company's shares.

Tesco said it was working to establish the extent of the issues and the impact they might have on its full-year profit.

ďIt looks like itís substantially a first half year (issue) and has more to do with timing, of when income is recognized," said Lewis.

Tesco has appointed a new tax adviser Deloitte to undertake an independent and comprehensive review of the issues, working closely with Freshfields, its external legal advisers. Tesco's current auditor PwC, which has worked for it since 1983, declined to comment.

The grocer said last month it expected trading profit for the six months ending Aug. 23 to be in the region of 1.1 billion pounds.

The new forecast of 850 million pounds means group trading profit has nearly halved from the 1.6 billion pounds it recorded in the comparable period last year.

Under its previous chief executive Phil Clarke, Tesco issued three profit warnings in two and a half years as it lost UK market share to fast-growing German discounters Aldi and Lidl as well as upmarket rivals Waitrose and Marks & Spencer.


Tesco explained in a statement on Monday that it had got its numbers wrong by overstating income and understating costs.

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"Tesco has identified an overstatement of its expected profit for the half year, principally due to the accelerated recognition of commercial income and delayed accrual of costs," it announced, adding some of the impact included "in-year timing differences".

Accrual accounting requires that a company record its payments as soon as it places an order with its suppliers rather than when it subsequently pays for it.

"Such an announcement is not the stuff of a well operated FTSE-100 organization," said Shore Capital's Black.

"This development may raise, indeed must raise, much more fundamental questions over the chairman's (Richard Broadbent) position and the nature, composition and extent of the board."

Broadbent said he did not intend to resign. "Shareholders Iím sure will decide...whether Iím part of the solution or part of the problem. But my intention is to continue being part of the solution."

Bernstein analyst Bruno Monteyne said the bringing in of Freshfields "implies there is potential foul play, beyond simple account stretching."

Lewis, who succeeded the ousted Phil Clarke on Sept. 1, is currently the firm's only executive director.

Alan Stewart was named as Tesco's new chief financial officer on July 10 but does not start until Dec. 1.

With a market valuation of 18.8 billion pounds and over 500,000 employees, Tesco had been the darling of the sector during two decades of uninterrupted earnings growth. Since the profit warnings and loss of market shares its share price had fallen to decade-lows.


By 5:52 a.m. EDT on Monday the stock was down 7.8 percent to 211.6 pence.

(additional reporting by Clara Ferreira Margues; writing by Kate Holton; editing by Sophie Walker)

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