Tesco announces probe after inflating profit guidance

On Monday, British supermarket giant Tesco plc said it had launched an investigation into its accounting practices after overstating its profit guidance for the first half, adding to its mounting problems. The company has suspended four senior executives.

Update October 1st, 2014: The Financial Conduct Authority said it would launch a full investigation into Tesco’s accounting practices.

Tesco shares on the London Stock Exchange fell nearly 12% in early trading on Monday.

Tesco plc says it inflated its expected profit by approximately ₤250 million ($408 million) after booking income that had not yet been earned and posting incurred costs later than it should have done. Put simply, Tesco’s accounting team was entering income too early and expenses too late.

The Cheshunt-based chain had previously forecast operating profit of approximately ₤1.1 billion.

Tesco’s Board of Directors has brought in Deloitte to carry out an independent and comprehensive review of the company’s accounts. External advisers Freshfields will also participate in the investigation.

Dave Lewis joined Tesco this year, the company has been losing market share for years.

Group CEO Dave Lewis, said:

“We have uncovered a serious issue and have responded accordingly. The Chairman and I have acted quickly to establish a comprehensive independent investigation. 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.”

Fierce competition at home

Tesco plc, which along with Carrefour SA is the second-biggest retail worldwide after Wal-Mart Stores Inc., is facing fierce competition from smaller, cheaper supermarket chains in its key domestic market.

Since the global crisis, British consumers have increasingly sought cheaper alternatives from discount retailers, including Lidl and Aldi.

Tesco’s attempts to grow more rapidly abroad have proved disappointing and costly.

In the last two years, it has issued four profit warnings. In August, Tesco cut its interim dividend by 75%.

The falling trend in sales appears to be accelerating. The company reported that August 2014 sales plunged more rapidly than in August 2013.