Sep 22, 2014 1:29 PM

Tesco suspends execs over inflated profit report

The Associated Press

LONDON (AP) Tesco, the world's second-largest supermarket chain after Walmart, has suspended four executives and launched an accounting investigation after admitting that its half-year profit was overstated by 250 million pounds ($407 million).

The scandal deepens the financial woes for the British company, which on Monday had to issue its third profit warning in two years as it struggles to compete with low-cost rivals. The announcements shocked investors, with shares plunging 11.6 percent to 203 pence at market close Monday. The problems have driven the company's stock down 46 percent in the past year.

The investigation, prompted by information from a whistleblower, comes less than a month after the new chief executive, Dave Lewis, was brought in to turn around the company's business.

"We have uncovered a serious issue and have responded accordingly," Lewis said in a statement.

Lewis took over from Philip Clarke after the company issued a profit warning at the end of August. At the time, Tesco said it expected to report "trading profit" of about 1.1 billion pounds for the six months ended Aug. 23. The retailer now plans to release its earnings for the period on Oct. 23, three weeks later than previously scheduled.

Tesco has long dominated the supermarket industry in Britain, but has recently been squeezed by aggressive cost-cutting competitors such as Lidl and Aldi.

The company, which last year was the world's second largest food retailer after Walmart when measured by revenue, said the overstatement of profits resulted from reporting commercial income too early and delays in booking some costs. The company asked audit firm Deloitte to begin an independent review, along with the group's external legal advisers.

Lewis stressed in an interview with the BBC that the decision to ask employees to stand aside was not an indication of guilt or that disciplinary action was warranted. He declined to speculate on what he might discover, but described it as a single incident.

"This is about getting to the bottom of a full and frank inquiry of what happened," he said.

The company does not have a chief financial officer at the moment. Alan Stewart begins work in December.

Shore Capital analyst Clive Black said the development is flabbergasting.

"Such an announcement is not the stuff of a well operated FTSE-100 organization."

Neil Saunders, managing director of retail consultancy Conlumino, said that while mistakes happen, it gives the impression of a company which is not fully in control of internal procedures.

"More significantly, it means that performance which is already extremely weak is actually much weaker than anticipated," he said. "This is something that will alarm investors and means that Tesco has much further to travel to recovery than first thought."


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