Tesco cut its profit forecast for the third time this year yesterday 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 per cent 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. A profit warning on August 29 had overstated expected first half profit by 23 per cent, 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 October 1 to October 23 by the firm’s new chief executive Dave Lewis, who said yesterday 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.
“It looks like it’s substantially a first half year (issue) and has more to do with timing, of when income is recognised,” 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 August 23 to be in the region of £1.1 billion.
The new forecast of £850 million means group trading profit has nearly halved from the £1.6 billion it recorded in the comparable period last year.
Such an announcement is not the stuff of a well operated FTSE-100 organisation
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 yesterday that it had got its numbers wrong by overstating income and understating costs.
“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 organisation,” said Shore Capital’s Black.
Bernstein analyst Bruno Monteyne said the bringing in of Freshfields “implies there is potential foul play, beyond simple account stretching”.
Since the profit warnings and loss of market shares its share price had fallen to decade-lows.