Tesco’s financial team and its auditor, PwC, face a formal investigation by the accountancy watchdog over the supermarket’s £263m overstatement of profits.
In the latest blow to the ailing retail group, the Financial Reporting Council (FRC) said it would examine the role of PwC as well as the behaviour of individuals at the auditor and at Tesco in relation to the preparation, approval and audit of accounts going back to February 2012.
PwC, which remains Tesco’s auditor, and individual chartered accountants working for the supermarket could potentially face unlimited fines, legal costs and exclusion from the profession if the watchdog finds evidence of misconduct that it can prove at tribunal.
The accountancy firm said: “We take our responsibilities very seriously and remain committed to delivering work to the highest professional standards. We will co-operate fully with the FRC in its inquiries.”
Tesco said it would provide support to the FRC’s investigation.
The latest probe follows an investigation launched by the Serious Fraud Office in October which the FRC said it was closely monitoring.
Just weeks after the early arrival of Tesco’s new chief executive, Dave Lewis, who was parachuted in at the beginning of September as the group battled falling sales and profits, a team of forensic accountants from Deloitte established that the estimate of first-half profits that Tesco gave the City in August was artificially inflated by £263m.
Deloitte said £118m of the figure related to the first six months of the current financial year and £145m related to previous years.
The inquiry triggered the suspension of nine senior executives, including Chris Bush, the head of the UK food business. Four of the executives have since left the business.
Some analysts have suggested executives pulled forward payments from suppliers to paint a more flattering picture of the finances of Britain’s biggest retailer as it struggled to meet profit targets. Lewis has dismissed the suggestion that fraud was involved: “Nobody gained financially as a consequence of the overstatement of performance.”
But the investigations come at a difficult time for Tesco as Lewis is attempting to turn around performance in the UK and manage ailing businesses overseas.
Earlier this month, Tesco’s shares slumped to a 14-year low as Lewis admitted the cost of cleaning up dealings with suppliers and bringing in extra shop-floor staff to improve service would slash £500m from annual profits. The City is braced for potential further profit falls when Lewis updates the City on his plans on 8 January after what is expected to be another tough Christmas. The grocer faces heavy competition from discounters such as Aldi and Lidl while it is locked in a bitter price war with major rivals including Asda and Morrisons.
