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 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.
“It looks like it’s 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.
"FUNDAMENTAL QUESTIONS"
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 I’m sure
will decide...whether I’m 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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