Regulator steps in over Tesco accounting scandal

The City regulator has launched a probe into Tesco following its recent £250 million overestimate of half-year profits, sending shares in Britain’s biggest supermarket group spiralling down.

Dave Lewis, Tescos new chief executive, could face a grilling from MPs over the firms finances. Picture: Getty

The probe by the Financial Conduct Authority, whose remit extends from investor protection to financial crime, comes after Tesco revealed last week that it had significantly overstated its profit forecast on 29 August – effectively its third profit warning in two months.

It is understood that the FCA inquiry will look into the way the grocery giant treated rebates paid by suppliers and whether they were reported in the correct time period.

Tesco had already ordered an independent review of the matter by accountancy firm Deloitte and City law firm Freshfields, and said today it would “continue to co-operate fully with the FCA and other relevant authorities considering this matter”.

The Financial Reporting Council, which regulators auditors, is monitoring the situation, as is the Serious Fraud Office.

Meanwhile, Adrian Bailey, chairman of the House of Commons business select committee, has said present and former directors of Tesco may be summoned to appear before MPs to explain how a business its size could get into such a mess.

Following news of the FCA inquiry, shares in Tesco fell a further 3.2 per cent to 180.2p – their lowest level since 2003. The stock market value of the food retailer has been slashed by one‑fifth – or £4 billion – since the accounting scandal emerged on 22 September.

Clive Black, retail analyst at broker Shore Capital, said: “Such an investigation [by the FCA] can only be another distraction for new chief executive Dave Lewis and represents another black mark on the board.”

Lewis joined the 95-year-old business from Unilever on 1 September, three days after the profit warning sparking the exit of his predecessor, Phil Clarke, who it was previously planned would not leave until the end of 2014 in order to smooth the handover.

Tesco has suspended four directors while the Deloitte investigation takes place.

Lewis said the suspensions would allow the group to carry out a “full and frank” inquiry into the affair and was not disciplinary or an indication of guilt.

The £250m overstatement of profit guidance for the half-year period emerged amid the company’s preparations for the interim results announcement, which has now been delayed until 23 October rather than the scheduled date today.

An internal whistle-blower brought the error to the attention of Tesco’s general counsel before being passed to Lewis.

The embarrassment comes as Tesco has been losing market share, like its main rivals Asda, Morrisons and Sainsbury’s, to the discounters Lidl and Aldi and upmarket operators Waitrose and Marks & Spencer.

One analyst said today: “The squeeze of the mainstream supermarkets by upper and lower end players continues, and Tesco also has the added problem of its own continued restructuring, and now this regulatory investigation. Its problems mount.”