By Peter Evans And Lisa Fleisher
LONDON-- Tesco PLC has suspended four senior executives and
called in outside auditors and legal counsel to investigate the
GBP250 million ($408.8 million) overstatement of the U.K.
supermarket operator's forecast first-half profit.
Tesco's newly installed chief executive, Dave Lewis, said on
Monday that the company has uncovered a "serious" accounting
issue.
The issue involved the early booking of commercial income and
delayed booking of costs, the company said, triggering a third
profit warning in three months. Tesco, which has done a preliminary
investigation into its U.K. food business, said it hasn't ruled out
illegal activity but would wait until the results of the
investigation are known.
"We have uncovered a serious issue and have responded
accordingly," said Mr. Lewis, the former Unilever executive who
took up the reins at Tesco on Sept. 1, a month earlier than
expected.
The accounting error puts in the line of fire a board of
directors long criticized for lacking retail experience, and
exposes the extent to which previous CEO Philip Clarke had lost
control of Tesco before the company announced his dismissal in
July.
Among Tesco's main problems has been its lack of an executive
clearly in charge of finances. Laurie McIlwee stepped down as chief
financial officer in April but won't be replaced until December,
when Alan Stewart--currently at Tesco's rival Marks & Spencer
Group PLC--takes over the role.
Mr. McIlwee has remained on the company's payroll as "CFO
emeritus," according to a Tesco spokesman. In that role he offers
advice but doesn't sit on the company's executive board and wasn't
involved in decisions related to the accounting irregularity.
Instead, Tesco's finances have been run directly by the CEO's
office during the last three months, according to a person with
direct knowledge of the situation. In that time, Tesco has issued
three profit warnings.
Mr. Clarke, who remains a Tesco employee, was acting as both CEO
and CFO until the end of August, according to the person. A Tesco
spokesman said Mr. Lewis assumed the interim-CFO role when he took
over as CEO.
Mr. Lewis and Tesco Chairman Richard Broadbent denied the
accounting issue could have been avoided by having a fully
functioning executive team.
"The finance function is working well with considerable
oversight," Mr. Broadbent told reporters.
Mr. Broadbent, a former deputy chairman of Barclays PLC, has
been Tesco chairman since 2011. He said the appointment of a new
CEO and CFO in the last 12 months demonstrated he had taken
significant steps to address Tesco's leadership problems. "You will
have to decide whether that's governance failure or governance in
action," he said.
Mr. Lewis said he became aware of the accounting issue on Friday
when an "informed" employee went to the company's general counsel.
Tesco has contacted its regulator, the Financial Conduct Authority,
Mr. Lewis said. "We've done everything we need to do," he said.
Mr. Lewis said four senior Tesco executives had been suspended
pending the investigation but declined to give any names. One of
the suspended executives is Chris Bush, U.K. managing director,
according to the person with direct knowledge of Tesco's
operations.
Mr. Lewis confirmed that Robin Terrell, formerly Tesco's
multichannel director, had been appointed to lead the U.K. business
but again declined to confirm Mr. Bush's suspension.
PricewaterhouseCoopers LLP has been Tesco's auditor since the
1980s. In its fiscal 2014 audit report on Tesco released in May,
PwC paid particular attention to commercial income, which involves
promotional deals, discounts and rebates negotiated with suppliers.
The audit firm said it matched up Tesco's recognized commercial
income with contractual evidence from suppliers. PwC declined to
comment Monday.
Tesco has engaged rival accounting firm Deloitte LLP to
investigate the first-half irregularity, along with law firm
Freshfields Bruckhaus Deringer.
Tesco's shares plunged in early trading Monday, falling as much
as 11%, before rallying slightly. The stock is trading at around
its lowest level since the fall of 2003.
Last month, the U.K.'s largest retailer cut its profit guidance
for the year to between GBP2.4 billion and GBP2.5 billion.
"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," Mr. Lewis
said.
The U.K. group, which vies with Carrefour SA of France for the
position of world's second-largest retailer behind Wal-Mart Stores
Inc., is struggling against fierce competition in its key home
market.
Customers have traded up for higher-end grocery stores or looked
for cheaper alternatives from discount retailers. Tesco has focused
heavily on international expansion and made several costly missteps
in the U.S. and China.
The latest issue poses a particular challenge for Tesco's new
boss.
The company had unloaded a raft of bad news, including a profit
warning and a 75% cut in its interim dividend, the week before Mr.
Lewis started in the hope of ensuring he began his new job with a
clean slate.
Traders and analysts were jolted by the news. Marc Kimsey, a
senior trader at Accendo Markets, put it bluntly: "Tesco is no
longer a viable investment."
"These are serious times for Tesco and its shareholders,"
analysts from Shore Capital said in a trading note. "We are
flabbergasted by this development."
Tesco has issued four profit warnings since January 2012, when
it issued its first in 20 years.
Costas Paris contributed to this article.
Write to Peter Evans at peter.evans@wsj.com and Lisa Fleisher at
lisa.fleisher@wsj.com
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