Tesco in turmoil after profits overstatement

Tesco, Britain's biggest retailer and one of its great corporate success stories of the last decade, has been thrown into turmoil after disclosing that it had overstated its first-half profit by £250m.

Four senior executives were suspended and shares in Tesco fell 12 per cent to 203p, their lowest level for 11 years, intensifying pressure on the board of the supermarket group as it issued its third profit warning in three months.

Tesco, whose auditor is PwC, has asked Deloitte and Freshfields to investigate the accounting errors. The Financial Conduct Authority, the UK's financial regulator, has been informed.

The crisis comes just three weeks after Dave Lewis, a former Unilever executive, took over as a new chief executive after his predecessor, Philip Clarke, was ousted in July following a torrid three years in charge. "This is something completely out of the ordinary and something we take extremely seriously," said Mr Lewis.

The upheaval was sparked when a manager in Tesco's finance department questioned figures for the first half of the year. On Friday afternoon he brought these to the company's general counsel who took them to Mr Lewis.

The accounting errors relate to the rebates that Tesco receives from suppliers as an incentive to sell more of their products or to help the supermarket fund promotions.

Sir Richard Broadbent, a leading City of London figure, who has been chairman since 2011, said: "For something like this to arise in a company is always a matter of regret." He added that the shareholders would decide "whether I'm part of the solution or part of the problem. My intention is to continue to be part of the solution."

Tesco was a British corporate titan in the 1990s and the first decade of the 21st century, rolling into 14 countries and expanding under Mr Clarke's predecessor, Sir Terry Leahy, from groceries to everything including banking and garden centres. But it has been beset by problems over the past few years, with the German discounters Aldi and Lidl and upmarket rivals J Sainsbury and Waitrose all nibbling at its sales.

Fitch Ratings said in a statement that Tesco's BBB credit rating, the second-lowest investment grade, was subject to review for possible downgrade.

Four senior managers, including Chris Bush, managing director of the UK business, have been suspended, during the investigation. The others are Carl Rogberg, UK finance director, John Scouler, commercial director, and Matt Simister, responsible for group sourcing.

Company insiders said that there were no current plans for a rescue rights issue, despite the latest announcement.

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The retailer now plans to release its earnings for the first half of the year on October 23, three weeks later than previously scheduled.

Shareholders were startled by news of the overstatement and some even called for Mr Clarke, and finance director Laurie McIlwee, who resigned in April, to return payments amounting to millions of pounds.

"This news is a real shocker," said Richard Marwood, a portfolio manager at Axa Investment Managers, a holder of Tesco shares. "These kind of accounting issues always shake investor confidence, but they are usually the kind of thing that occur in the smaller end of the market, not the FTSE 100."

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