Tesco takes £234m hit over accounting scandal

posted by Su-San Sit
in Law
28 March 2017

Tesco has agreed to pay out £234m in fines and compensation to settle an investigation by regulators into the misstating of profits in 2014.

The retail giant said it would pay a fine of £129m as part of a Deferred Prosecution Agreement (DPA) struck with the Serious Fraud Office (SFO) to avoid a criminal conviction, pending court approval on 10 April.

In a historic move, Tesco also reached a deal with the Financial Conduct Authority (FCA) to set up a £85m compensation scheme for investors who bought shares and bonds in Tesco on or after 29 August 2014 as the share price was inflated when the firm reported inaccurate financial results.

It is the first time the FCA has used its powers to get a listed company to pay compensation for market abuse, according to Reuters.

An FCA database shows there were around 10,000 retail and institutional investors who, between them, purchased approximately 329m shares during the period and who may be eligible for compensation under the scheme.

However, the FCA said it would take not impose a financial penalty against the supermarket chain for market abuse.

“In light of the conduct of Tesco and Tesco Stores in accepting responsibility for market abuse, in agreeing to the first compensation order under section 384 and, in the case of Tesco Stores, for accepting responsibility for false accounting, the FCA will not impose any additional sanction on the for market abuse,” it said.

Both agreements between Tesco, the SFO and FCA are not an admittance by the company that it or any of its employees committed a criminal offence, according to Tesco. 

The settlement is the culmination of an investigation into false accounting by Tesco’s UK business between February 2014 and September 2014 when it exaggerated profits by £326m.

SM previously reported that on 22 September 2014, Tesco admitted it had overstated profits for the first six months of 2014 by £250m, principally due to “delayed accrual of costs” and “accelerated recognition of commercial income”, which the supermarket defined as “promotional monies, discounts and rebates receivable from suppliers”.

The scale of the problem dragged the grocer into a £6.4bn loss in 2015—one of the largest in corporate history, according to the Guardian.

In the aftermath of the discovery, Tesco suspended eight directors, and the SFO charged three former executives with fraud. 

The SFO allege the three Tesco executives had deliberately and repeatedly withheld money owed to suppliers to boost its sales performance artificially, in a serious breach of supermarket regulations.

Chris Bush, the company’s former UK boss, Carl Rogberg, the ex-UK finance director and John Scouler, former UK commercial director, are due to stand trial next year.

Tesco chief executive David Lewis, who took charge of the brand in September 2014 shortly after the scandal broke, said the settlement allowed the company to move on.

“What happened was a huge source of regret to all of us at Tesco, but we are a different business now,” he said.

“I am pleased with how our colleagues have responded and that has allowed us to rebuild the business since 2014.”

Lewis admitted the Tesco brand had been damaged by the disclosure of the scandal but the company was doing everything it could to restore trust. 

Bruno Monteyne, an analyst at investment research firm Bernstein, told the Guardian that Tesco had now settled three out of the four challenges relating to the scandal but still had one more hill to climb.

“That leaves one more issue from the past to be dealt with: possible lawsuits by European-based investors,” he said.

“The short period of time covered by both the SFO ruling and the FCA ruling seems to imply very limited opportunity for these cases to extract large compensation.”

Tesco is currently facing civil litigation from a group of 125 large investors who claim to have lost in excess of £100m as a result of the accounting scandal, according to the Telegraph.

The DPA between Tesco and the SFO follows a settlement with Rolls Royce in January, which saw the company agree to pay £671m over allegations that it bribed middlemen around the world between 1989 and 2013.

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