October 1, 2014 / 6:17 AM / 5 years ago

British financial watchdog to investigate Tesco accounting scandal

LONDON (Reuters) - Britain’s financial watchdog has launched a full investigation into the Tesco (TSCO.L) accounting scandal that has now wiped 4 billion pounds from the troubled grocer’s stock market value.

A sign spells out the store name on a Tesco store in Bow, east London August 29, 2014. REUTERS/Paul Hackett

Tesco, Britain’s biggest grocer and the world’s third-largest retailer, announced on Sept. 22 that it had overstated first-half profit by 250 million pounds - effectively its third profit warning in two months.

The news of the Financial Conduct Authority investigation sent Tesco’s shares down 3 percent to 180 pence by 1011 GMT (11:11 p.m. BST) on Wednesday. That was the stock’s lowest level since 2003, with the price down 21 percent since the accounting mistake was disclosed.

“Tesco will continue to co-operate fully with the FCA and other relevant authorities considering this matter,” the company said in a statement.

The accounting error highlighted the scale of the challenge facing new Chief Executive Dave Lewis, who joined the 95-year-old business on Sept. 1, three days after a previous profit warning on Aug. 29.

“Such an investigation (by the FCA) can only be another distraction for new CEO Dave Lewis and represents another black mark on the board,” Shore Capital analyst Clive Black said.


Lewis is firefighting on multiple fronts. Industry data shows that Tesco is the worst performer of Britain’s so-called Big Four grocers, which also includes Wal-Mart’s (WMT.N) Asda, Sainsbury’s (SBRY.L) and Morrisons (MRW.L), with its market share dropping to 28.8 percent at Sept. 23 from 30.2 percent a year earlier.

A two-decade run of uninterrupted earnings growth began to unravel as Tesco started losing British market share to German discounters Aldi [ALDIEI.UL] and Lidl [LIDUK.UL], as well as upmarket rivals Waitrose [JLP.UL] and Marks & Spencer.

The company's shares, meanwhile, have lost half of their value in the past 12 months, significantly underperforming Britain's blue-chip FTSE 100 index .FTSE, which is trading 2.3 percent higher than a year ago.

Tesco, which has more then 500,000 employees, now has a market capitalisation of 14.6 billion pounds, against nearly 19 billion pounds before the accounting scandal emerged.

In the wake of the profit overstatement revelation, which related to the mis-booking of rebate payments from suppliers, the company suspended four senior executives and launched its own investigation, calling in forensic accountants and lawyers.

The company said in its statement that the FCA’s investigation will be in addition to the independent review already being conducted by accountant Deloitte.

Further scrutiny of the grocer could also come from British lawmakers. The chairman of a parliamentary committee said last week that he might want to grill Tesco’s top executives about the accounting scandal.

Separately on Wednesday rival supermarket chain Sainsbury’s cut its full-year sales forecast after trading fell sharply in the second quarter.

Editing by James Davey and David Goodman

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