New blow for Tesco as impact of accounting error revealed

For several years, Tesco has been the largest high street retailer, emerging from the recession in a position of real strength. However, the past year has seen its position decline alarmingly, with the true extent of the malaise only now being laid bare.

The first signs of trouble appeared last month when it became clear that previous projections over the levels of revenue and profits were set to be wildly exaggerated. This led to some serious ramifications, with chief executive Philip Clarke and chief finance officer Laurie McIlwee both stepping down. Their actions are under an internal investigation and no payoff will be made to either until it is concluded.

With the Financial Conduct Authority (FCA) investigating and even the possibility of criminal proceedings, Tesco has sought to get to the bottom of why it got the sums so badly wrong. It appointed accountancy firm Deloitte, which has discovered that errors in accounting in the company’s food retailing arm have been going on for years. The black hole amounts to no less than £263 million, of which £118 million relates to its erroneous first-half profit calculations for the current year.

As a result, the company has now revealed in its interim results statement that the pre-tax profit for the first six months of the year was down to £112 million, a year-on-year fall of 91.9 per cent. Alongside this was a like-for-like drop in UK sales of 4.6 per cent. Naturally, shares in Tesco have plunged.

Faced with this calamity, chairman Sir Richard Broadbent has announced he will become the latest senior executive at the retailer to fall on his sword, with the new senior management team being tasked with restoring the fortunes of the troubled company.

He said: “The issues that have come to light over recent weeks are a matter of profound regret. We have acted quickly to clarify the financial performance of the company. A new management team is in place to address the root causes of the mis-statement and to develop and implement the actions that will build the company’s future.

“I am confident that the new chief executive and chief financial officer will move rapidly and effectively in this respect.”

Adding his comments, new chief executive Dave Lewis said that while the review of the entire company goes on, three areas – UK competitiveness, the strengthening of the balance sheet and the restoration of “trust and transparency” in the brand – would be the priority.

Those tasked with solving the crisis alongside Mr Lewis include the new chief financial officer Alan Stewart. One of the first items in their in-tray will be the FCA investigation, which was announced on October 1st. The Deloitte findings will now be passed to it to form part of the evidence gathering for this probe.

While the task may be a daunting one, success in the quest to turn Tesco’s fortunes around from this position will be an outstanding achievement. The retailer’s stakeholders will hope the new management is more inspired than daunted by the challenge.

Corporate governance recruitment at Barclay Simpson