Tesco rushes in new finance director to deal with accounting scandal

http://www.theguardian.com/business/2014/sep/23/tesco-finance-director-accounting-profits

Version 0 of 1.

Tesco’s new finance director, Alan Stewart, was parachuted into the crisis-hit grocer on Tuesday two months ahead of schedule to help a squad of external investigators working at the retailer’s head office to get to the bottom of the accounting scandal that saw profits artificially inflated by £250m.

As another £700m was wiped off the stock-market value of Tesco – taking the overall value of the chain to about half its worth of a year ago – Stewart was released early from his Marks & Spencer contract after a personal plea from Tesco boss Dave Lewis to his counterpart, Marc Bolland.

The South African, who has also held the top finance jobs at Thomas Cook and WH Smith, will provide some ballast to a listing Tesco board that has been purged of full-time directors over the last two years. It has had no finance chief for five months.

Stewart’s arrival coincided with new data showing Tesco’s UK sales slumping 4.5% in the three months to mid-September compared with last year. At the same time, sales at rival Aldi, which has been stealing Tesco customers in swaths, have soared by nearly 30%. The Kantar Worldpanel data underlines the challenge faced by Lewis as the grocery market is now growing at the slowest rate on record. Kantar’s measure of food inflation stands at 0%.

The Tesco profits inquiry, which will examine whether the retailer accounted for payments from suppliers improperly, has rocked investor confidence, with some shareholders openly questioning the leadership of chairman Sir Richard Broadbent.

The investigation, prompted by information from a whistleblower, saw Lewis announce the suspension of four senior executives, including Chris Bush, the head of the UK food business, on Monday. Accountants and lawyers from Deloitte and Freshfields are poring over the books to assess whether supplier payments were being brought forward and business costs delayed in order to paint a better picture of the retailer’s financial health.

Tesco’s fall from grace spells huge losses for pension funds, traders, small investors and staff who hold the shares. The accounting watchdog, the Financial Reporting Council, is watching developments and says it could launch its own investigation if there is evidence of investor detriment, while Moody’s warned the retailer could face a credit downgrade after it put its rating on review.

Supermarkets demanding financial contributions from their suppliers – and how they record these payments – is a widespread problem, according to accountants Moore Stephens. It estimates the payments are worth several billions of pounds a year to the top 10 supermarkets. “The Tesco scandal highlights the supermarkets’ reliance on supplier contributions,” said Duncan Swift, of its food advisory group. “All the major supermarkets put onerous requirements on their suppliers to make contributions for things like promotions and general marketing.”

Swift believes supermarkets should be forced to disclose supplier contributions in their trading statements.

Bolland is understood to have felt that after three months of gardening leave - and given the turmoil faced by Lewis who is just three weeks into the job - it was no longer necessary to hold Stewart to the December start date previously brokered.

Tesco has issued five profit warnings over the last two years. Stewart has less than four weeks to put together the retailer’s half-year results, which have been delayed till the end of October to enable the investigators to put together as full a picture as possible of the retailer’s financial health. When Lewis and Stewart face the City in October, investors are braced for another round of write-offs that they hope will bring an end to the bad news.

The Kantar data shows that grocery sales grew by just 0.3% over the last three months, the lowest level recorded since Kantar Worldpanel started monitoring the industry in 1993, while Aldi and Lidl continue to race ahead with sales growth of 29.1% and 17.7% respectively.

The news knocked more than £1bn off the stock market values of the listed grocers, with Sainsbury the biggest faller in the FTSE-100, its shares down 5%.

Tesco could now face pressure from shareholders to withhold payments destined for former chief executive Phil Clarke and Laurie McIlwee, the finance director who resigned in April, until the outcome of the investigation is known. Laurie McIlwee is contractually entitled to a payoff of a year’s salary, £886,420, because he left by mutual agreement. Clarke, who was ousted to make way for Lewis, is in a similar position, and is scheduled to receive £1.1m in January when his handover period ends.