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Tesco CEO Responds to Profit Overstatement Scandal and Suspensions

New Tesco Plc CEO Dave Lewis already knew that he was walking into a delicate situation, but he hasnt even been on the job a full month yet and already ...

Frazer Jones
|Sep 22|magazine11 min read

New Tesco Plc CEO Dave Lewis already knew that he was walking into a delicate situation, but he hasn’t even been on the job a full month yet and already things have taken a sharp and drastic turn for the worse. Today it was announced that four high-ranking executives have been suspended from Tesco for overstating the company’s half-year expected profits by £250 million (roughly $409 million USD).

For some perspective on how big a discrepancy that is, the BBC reports that £250 million is equivalent to about a quarter of Tesco’s expected profit for that time period. In other words: significant enough for the BBC to quote Lewis saying: “disappointment would be an understatement.”

So far, four senior executives have been suspended as a result of this scandal: UK chief executive Chris Bush, UK finance director Carl Rogberg, food commercial director John Scouler, and head of food sourcing Matt Simister. There is no indication yet that there are more suspensions to come, though former Tesco CEO Philip Clarke will likely be brought in for questioning. Lewis has also launched an independent investigation helmed by professional services and auditing firm Deloitte, and released a curt statement to the press:

“We have uncovered a serious issue and have responded accordingly.  The Chairman and I have acted quickly to establish a comprehensive independent investigation.  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.”

 

How exactly did this misreporting happen? According to The Telegraph it all has to do with Tesco playing fast and loose with supplier payments, paying those suppliers late while extracting money from accounts ahead of schedule, a problem that Cantor Fitzgerald analysts had been monitoring as early as last year:

Analysts at Cantor Fitzgerald warned last November that Tesco was boosting profits by £200m by deducting cash from suppliers’ trading accounts or extending payment dates without notice. This is a breach of the Groceries Supply Code of Practice, which was put in place last August, and if Tesco has breached contractual agreements and misstated financial accounts it could be even more serious than that.

 

The discrepancies were then allegedly brought to light by an undisclosed staff member who notified Tesco’s general counsel that account numbers were not adding up, a notification that was then escalated to Lewis himself.

The reasoning for fudging the numbers is pretty straightforward – Tesco sales have been suffering over the last couple of years, hit by stiff competition on either side from more specialized upscale and discount stores like Waitrose and Aldi. Ousting Clarke from the chief executive was a drastic move, but this investigation seems to show that it wasn’t the only drastic move Tesco executives were making – with some of those moves more ill-advised than others. According to The Telegraph, investigators are currently trying to decipher whether Clarke simply let company operations get out of hand, or whether he directly authorized the bad behavior under scrutiny now as an attempt to boost figures and save face.

But no matter how it came about, it is now the situation placed in Lewis’s lap to handle. In his statement, Lewis noted that Tesco should be able to report at least interim findings shedding more light on the nature of the issue by October 23, 2014.

In the meantime, shareholders are expressing their displeasure with the news through the stock market: the BBC reports that Tesco share prices plummeted 11.6 percent on the London Stock Exchange, losing nearly £2.2 billion in overall value to close at a rate of 203p per share.

[SOURCE: BBC; Telegraph]