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Tesco to face criminal probe after £263million hole found in profits Tesco to face criminal probe after £263million hole found in profits
(34 minutes later)
Tesco has formally been placed under criminal investigation by the Serious Fraud Office (SFO) following its discovery of a £263 million hole in profit expectations. Tesco’s senior bosses face the potential threat of jail after the Serious Fraud Office launched a criminal investigation into the ailing supermarket’s £263m accounting scandal.
The group said that in light of the SFO probe, a separate investigation by the Financial Conduct Authority (FCA) has been closed. The SFO confirmed that its director, David Green, has opened a probe into “accounting practices” at Tesco following the huge black hole in the profits of the UK’s biggest retailer which was first revealed a month ago.
It comes after a probe for Tesco by accountants Deloitte and law firm Freshfields found the accounting error was worse than first thought and that the supermarket had been overstating its earnings for some years. Accountants Deloitte and law firm Freshfields – appointed by Tesco – found the accounting error was worse than first thought and that the supermarket had been overstating its earnings for some years.
In a statement, the group said: “Tesco confirms that it has been notified by the Serious Fraud Office that it has commenced an investigation into accounting practices at the company. The accounting scandal, which shocked the City, centres on the company booking deals such as rebates from suppliers too early, and deferring costs to inflate profits.
“Tesco has been co-operating fully with the SFO and will continue to do so. Eight senior members of staff have been suspended, representing a serious blow to a retailer gearing up for the Christmas trading period.
“Tesco has been notified by the Financial Conduct Authority that, in light of the SFO investigation, its investigation will be discontinued.” Tesco said it “has been co-operating fully with the SFO and will continue to do so”.
The SFO confirmed that its director David Green QC “has opened a criminal investigation into accounting practices at Tesco plc”. The SFO’s decision to launch a full criminal investigation – which can take years in some cases – means it is satisfied that there are reasonable grounds to suspect serious or complex fraud or bribery. The agency is likely to take months sifting through vast quantities of digital data and other evidence, while seeking to identify and trace witnesses.
It said that as the investigation was under way it could not provide further details. Tesco’s new chief executive, Dave Lewis, unveiled the overstatement just  three weeks after he began the huge task of turning around the company’s fortunes.
The SFO is responsible for investigating and prosecuting serious and complex fraud and corruption. The figure is bigger than the £250m first feared, although Mr Lewis insisted last week at the firm’s half-year results that there was no evidence of fraud or personal gain from the accounting manipulation.
The FCA confirmed that it had “decided to discontinue its own investigation with immediate effect”. The City regulator, the Financial Conduct Authority, is dropping its own investigation in light of the SFO’s decision, although Britain’s accounting watchdog, the Financial Reporting Council (FRC), is “giving careful consideration” to whether it should take action.
Accounting watchdog the Financial Reporting Council has also said it is “giving careful consideration” to whether it should take regulatory action. The role of accountancy firm PwC – Tesco’s auditor since 1983 – is also likely to face fierce examination, while the supermarket’s suppliers have also called in their own auditors to examine whether their accounts are affected.
Last week, Tesco said pay-offs totalling around £2 million to departed chief executive Philip Clarke and former finance director Laurie McIlwee had been suspended pending investigations. Tesco’s shares have halved in the past year as the accounting shock comes against the backdrop of a bitter price war.
  Meanwhile, eight executives including UK managing director Chris Bush have been asked to step aside. The once-mighty Tesco – which sacked former chief executive Phil Clarke earlier this year – has been losing ground to discounters Aldi and Lidl. It has also struggled to attract shoppers to larger, out-of-town stores as consumers trend towards shopping online and “top-up” visits to convenience shops. Tesco’s overseas empire has meanwhile been struggling and seen by analysts as ripe for a sell-off to shore up the UK business.
Chairman Sir Richard Broadbent last week said that he was preparing to step down to show someone was “carrying the can” for the scandal - which was “a matter of profound regret”. Warwick Business School Professor Crawford Spence said: “Now that Tesco are being investigated for fraud, the  FRC have yet greater reason to start an investigation into the auditors’ role with regard to these irregularities.
Deloitte's probe into the affair, which involved rebates from suppliers being moved around to different periods on the company's balance sheet, found it had been going on for some years and at least as far back as the 2012/13 period. “Tesco have been losing market share to their competitors steadily in recent years and losing value quite dramatically in their share price in recent months. Rather than fix the underlying problems, they have been playing around with their numbers to try and make things look better.”
New chief executive Dave Lewis tried to draw a line under the episode as he unveiled details of the inquiry while reporting a 92% fall in first-half profits and deteriorating sales last week.
But Tesco has now had to re-write its rules on dealing with suppliers in light of the mistakes and said this would have an impact on its second-half performance.
The Deloitte probe involved more than six million documents with 18,000 invoices reviewed and 700 scrutinised in detail.
It found a £118 million trading profit shortfall related to the latest half-year plus a £70 million hit for the previous financial year and £75 million for 2012/13.
Tesco first announced last month that it had discovered a problem but initially expected it to result in a £250 million overstatement - lower than the sum it eventually calculated.
Details of the probe revealed that, once started, the accounting error seems to have spiralled out of control, as Tesco said “current and prior practices appear to be linked as income pulled forward grew period by period”.
But Mr Lewis brushed off any suggestion of fraud, saying that no-one had gained financially from the mistake.
The new boss is trying to turn the performance of the grocer around as it faces sliding sales amid a squeeze on market share from discounters Aldi and Lidl and a price war with its more established rivals.