By Ian Walker
LONDON--The U.K.'s Financial Reporting Council on Monday said it
has launched an investigation into Tesco PLC's accounts for fiscal
2012, 2013 and 2014, following the recent accounting scandal at the
supermarket chain.
The FRC said it was investigating the parties involved in the
preparation, approval and audit of Tesco's financial statements for
the years in question, as well as their conduct in relation to
accounting practices that led to a GBP263 million ($410.75 million)
overstatement of the company's first-half profit forecast.
The FRC, which regulates corporate governance and reporting in
the U.K., had previously said it was monitoring the situation.
The FRC's Financial Reporting Review Panel can require a company
to restate its financial statements. The FRC also has the power to
discipline accountants for misconduct.
Tesco first flagged issues with its accounts in September,
suspending four senior executives and calling in outside auditors
and legal counsel to investigate the overstatement of its forecast
first-half profit. The issue resulted in the company issuing its
third profit warning in as many months.
The company, which vies with Carrefour SA for the title of
world's second-largest retailer behind Wal-Mart Stores Inc., has
since suspended more executives and issued yet another profit
warning earlier this month. Although Tesco remains the U.K.'s
largest retailer by sales, its market share has been declining for
years amid intense competition from aggressive discounters and
high-end grocers.
PricewaterhouseCoopers, Tesco's longtime accounting firm and
conducting the external audit, said it would work with the FRC. A
person with knowledge of the matter said the FRC would be looking
into both Tesco's accounting practices over the three years and the
PwC audit. The person said that the FRC investigation was to be
expected as it has been tracking the Tesco issue since September
and "there is a clear public interest into this matter."
"We take our responsibilities very seriously and remain
committed to delivering work to the highest professional standards.
We will cooperate fully with the FRC in its enquiries," PwC said in
a statement.
In October, the retailer said the accounting practices that led
to the error had also occurred in prior periods.
The accounting practices in question involved the early booking
of commercial income--or promotional money, discounts and rebates
from suppliers--and delayed booking of costs, according to the
company. 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.
The U.K. Serious Fraud Office has also opened a criminal
investigation into Tesco's accounting practices.
Another person involved in the matter said the SFO was also
looking to interview some of Tesco's main suppliers.
"Tesco's suppliers including Diageo and Unilever will likely be
contacted by the SFO sometime in January," the person said.
"Since the Tesco issue involves promotions by its suppliers, the
SFO wants to see whether the Tesco account on promotions is in line
with what the suppliers understood or agreed," the person added,
without elaborating.
Diageo PLC, the world's largest alcoholic drinks company, and
Unilever PLC, the world's second-largest maker of consumer goods
after Procter & Gamble Co., weren't immediately available for
comment.
An SFO spokeswoman said the investigation into Tesco's accounts
is continuing, without elaborating.
Tesco shares were down 1.5% to 184 pence in early afternoon
London trading. The shares have rebounded from a 15-year intraday
low of 155 pence reached Dec. 9, the day of the company's most
recent profit warning.
Write to Ian Walker at ian.walker@wsj.com and Costas Paris at
costas.paris@wsj.com
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