By Peter Evans And Lisa Fleisher
LONDON--In the latest of a series of setbacks for a
once-highSHYflying global retailer, the U.K.'s Tesco PLC has
suspended four senior executives and called in outside auditors and
legal counsel to investigate a GBP250 million ($408.8 million)
overstatement of its forecast first-half profit.
The newly installed chief executive, Dave Lewis, said Monday
that Tesco had uncovered a "serious" accounting issue, amounting to
a third profit warning in as many months.
The company said an employee alerted its general counsel on
Friday about an issue involving the early booking of income and
delayed booking of costs. Tesco said it had done a preliminary
investigation into its U.K. food business and hadn't ruled out
illegal activity but would wait until the results of the
investigation were known.
The accounting error puts in the line of fire a board of
directors long criticized by shareholders and industry analysts for
lacking retail experience, and exposes the scale of the problem
faced by Mr. Lewis in only his fourth week at the company.
"We have uncovered a serious issue and have responded
accordingly," said Mr. Lewis, the former Unilever PLC executive who
took up the reins at Tesco on Sept. 1, a month earlier than
expected. The former CEO, Philip Clarke, was dismissed in July.
Tesco--which vies with Carrefour SA of France for the position
of world's second-largest retailer by revenue behind Wal-Mart
Stores Inc.--won applause for its swift growth and global ambitions
through the 1990s and early 2000s. But it has weakened since the
2008 economic downturn. It took heavy losses on U.S. chain Fresh
& Easy, unloading it last year to Ron Burkle's Yucaipa Cos.,
and has retreated from several other international markets. Its
still-leading market share in the U.K. has steadily eroded in the
face of competition from both higher-end grocery stores and
aggressive discounters.
Among Tesco's main problems has been its lack of an executive
clearly in charge of finances. Laurie McIlwee stepped down as chief
financial officer in April but won't be replaced until December,
when Alan Stewart--currently at Tesco's rival Marks & Spencer
Group PLC--takes over the role.
Mr. McIlwee has remained on the company's payroll as "CFO
emeritus," according to a Tesco spokesman. In that role he offers
advice but doesn't sit on the company's executive board and wasn't
involved in decisions related to the accounting irregularity.
Instead, Tesco's finances have been run directly by the CEO's
office during the past three months, according to a person with
direct knowledge of the situation. In that time, Tesco has issued
three profit warnings.
Mr. Clarke, who remains a Tesco employee, was acting as both CEO
and CFO until the end of August, according to the person. A Tesco
spokesman said Mr. Lewis assumed the interim-CFO role when he took
over as CEO.
Mr. Lewis and Tesco Chairman Richard Broadbent denied the
accounting issue could have been avoided by having a fully
functioning executive team.
"The finance function is working well with considerable
oversight," Mr. Broadbent told reporters.
Mr. Broadbent, a former deputy chairman of Barclays PLC, has
been Tesco chairman since 2011. He said the appointment of a new
CEO and CFO in the last 12 months demonstrated he had taken
significant steps to address Tesco's leadership problems. "You will
have to decide whether that's governance failure or governance in
action," he said.
Mr. Lewis said he became aware of the accounting issue on Friday
when an "informed" employee went to the company's general counsel.
Tesco has contacted its regulator, the Financial Conduct Authority,
Mr. Lewis said. "We've done everything we need to do," he said.
Mr. Lewis said four senior Tesco executives had been suspended
pending the investigation but declined to give any names. A
separate person familiar with the situation said the suspended
executives are Chris Bush, U.K. managing director; Carl Rogberg,
U.K. finance director; Matt Simister, head of group sourcing; and
John Scouler, commercial director. Only Mr. Rogberg responded to an
emailed request to comment and he declined.
Mr. Lewis confirmed that Robin Terrell, formerly Tesco's
multichannel director, had been appointed to lead the U.K. business
but again declined to confirm Mr. Bush's suspension.
PricewaterhouseCoopers LLP, Tesco's auditor since the 1980s,
hadn't yet examined the figures at issue in the first-half
overstatement. But in its fiscal 2014 audit report on Tesco,
released in May, PwC paid particular attention to commercial
income, which involves promotional deals, discounts and rebates
negotiated with suppliers. The audit firm said it matched up
Tesco's recognized commercial income with contractual evidence from
suppliers. PwC declined to comment Monday.
Tesco has engaged accounting firm Deloitte LLP to investigate
the first-half irregularity, along with London law firm Freshfields
Bruckhaus Deringer.
Tesco's shares plunged nearly 13% in London trading Monday and
have been cut in half since 2011. The stock is trading around its
lowest level since the fall of 2003.
Last month, the U.K.'s largest retailer cut its profit guidance
for the year to between GBP2.4 billion and GBP2.5 billion. Tesco
now has issued four profit warnings since January 2012, when it
issued its first in 20 years.
"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," Mr. Lewis
said.
The latest issue poses a particular challenge for Tesco's new
boss.
The company had unloaded a raft of bad news, including a profit
warning and a 75% cut in its interim dividend, the week before Mr.
Lewis started in the hope of ensuring he began his new job with a
clean slate.
Traders and analysts were jolted by the news. Marc Kimsey, a
senior trader at Accendo Markets, put it bluntly: "Tesco is no
longer a viable investment."
"These are serious times for Tesco and its shareholders,"
analysts from Shore Capital said in a trading note. "We are
flabbergasted by this development."
Costas Paris contributed to this article.
Write to Peter Evans at peter.evans@wsj.com and Lisa Fleisher at
lisa.fleisher@wsj.com
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