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Tesco has been plunged deeper into crisis after it was forced to suspend four senior executives and call in investigators following the discovery that its profits had been artificially inflated by £250m.
More than £2bn was wiped off the value of Britain’s biggest retailer on Monday after its new chief executive told the City that forensic accountants and lawyers had been drafted in to scrutinise its books in the wake of a warning from a whistleblower that payments from suppliers were being misbooked and business costs were being glossed over. Tesco said the changes had misleadingly boosted profits by £250m in the first six months of the year.
The retailer, which banked £1.6bn profit in the first six months of 2013, is now expected to make half that this year. The seriousness of the situation meant the figure could fall further still.
One of the four men suspended was Chris Bush, the most senior executive outside the Tesco boardroom as the manager who oversees its UK operations, which rang up sales of £48bn last year. “We have uncovered a serious issue and have responded accordingly,” said Tesco’s chief executive, Dave Lewis, who admitted he did not yet know whether the practice had been going on for some time.
There were reports that senior staff at what is the UK’s largest private-sector employer had been asked to hand in company laptops and phones as the inquiry, led by the accountancy firm Deloitte and law firm Freshfields, got under way.
Lewis, who has been running Tesco for just three weeks after his predecessor, Phil Clarke, was axed amid a sales slump, said the matter had also been reported to the Financial Conduct Authority. The regulator has the power to prosecute those who make deliberately or recklessly misleading statements to the stock exchange. The company has also been forced to take the unprecedented step of delaying reporting its half-year results to the City by three weeks.
Tesco refused to name the individuals at the centre of the investigation but they are understood to be Bush, who has worked for Tesco for 32 years, his number two, Carl Rogberg, John Scouler, its commercial director, and Matt Simister, head of group sourcing.
The practices uncovered by the whistleblower are understood to include the acceleration of payments from suppliers for in-store promotions and bonus payments – also paid by suppliers – when the retailer hits sales targets. The question marks over business costs are thought to centre on figures booked for food that is out of date, and stock theft.
The whistleblower alerted Tesco’s top lawyer to the mis-statements on Friday afternoon and the information was passed immediately to Lewis.
Prior to joining the retailer, the chief executive spent 27 years at Unilever, a major Tesco supplier, but claimed to have never seen supplier payments handled in this way. “We have asked four people, senior people, to step aside,” he said, adding that the action was “not disciplinary or an indication of guilt”.
“We will let the investigation determine whether any rules were broken and what I need to do to address that.”
Clive Black, an analyst for stockbrokers Shore Capital, said he was “flabbergasted” by the latest turn in the ailing supermarket’s fortunes: “This is not the stuff of a well-operated FTSE-100 organisation.”
The accounting inquiry is a disastrous start to Lewis’s reign. He was drafted in from consumer goods giant Unilever to turn around a business that is losing its grip on the UK grocery market as discounters Aldi and Lidl steal shoppers, and the big weekly shop falls out of fashion. More than £10bn has been wiped off the company’s stock market value this year as investors, faced with a grim picture of declining sales and profits, turn their backs. On Monday the shares closed down more than 11% at 203p, their lowest level in more than a decade.
The revelations led to calls for Tesco’s chairman, Sir Richard Broadbent, to go. His position, according to Black, is “untenable” after overseeing a clearout of top executives that by the end of the summer left the company with just one – Clarke – who was eventually sacked as well. “There should have been a resignation as well as four suspensions to my mind,” said Black.
Tesco has poached Alan Stewart from Marks & Spencer to be its new finance director but he is not due to start until December. The previous finance director, Laurie McIlwee, resigned in April and is not thought to have been involved in the day-to-day running of the business since then, despite remaining on the payroll, leaving a critical post unmanned.
Broadbent denied the board should have spotted the problem. “Things are always unnoticed until they are noticed,” he said. “This is not a welcome development but it has been caught.”
Asked whether he would resign, Broadbent said: “Shareholders will have to decide whether I’m part of the solution or the problem. I intend to be part of the solution.”
Also facing scrutiny are Tesco’s longstanding auditors PwC, who, in the retailer’s most recent annual report, said they had looked closely at the timing of payments from suppliers before signing off the accounts. PwC has been asked to assist with the investigation but rival accounting firm Deloitte has been asked to make an independent judgment.
One Tesco shareholder said: “There are going to be questions about internal controls, oversight of the processes that were in place and the role of the auditor.”
In the past, analysts have accused Tesco of overstating profits by booking rebates or bonuses from suppliers early. It is common practice in the industry to agree a cost price with a supplier at the start of the year but to receive a discount at a later date based on hitting sales targets. Deciding when to book these payments is “art rather than science”, according to one industry insider, but the margin for error would never be expected to be of the magnitude reported by Tesco.
“Lots of different businesses flex when they choose to put certain cheques in the bank to hit quarterly targets,” said Kantar Retail analyst Bryan Roberts of the supplier payments. “This is mobile money not related to the timing of sales. But its robbing Peter to pay Paul because if you bring it forward you would have to compensate in the following period.”
Who are the suspended executives?
Chris Bush, managing director, Tesco UK
Bush, 47, joined the company in 1982 and spent more than a decade as UK store director before stints heading Tesco in South Korea, Malaysia and Thailand. He returned to the UK as chief operating officer in 2012 and was promoted to the top job in the UK, where the company makes 70% of its sales, in January 2013.
Bush says in his profile on the Tesco website that the best piece of advice he was ever given was: “Focus on doing your very best in the job you have and your career will look after itself.”
Carl Rogberg, UK finance director
Rogberg worked for Kraft between 1992 and 2000 before co-founding the mobile payments company Mint. In 2004 he went to work for the foreign study company Education First in Hong Kong.
He began his career at Tesco as international finance director for Asia in 2006, moving to Thailand to be finance director of Tesco Lotus, where he worked for Bush.
John Scouler, commercial director
A sporadic tweeter and Newcastle United fan, Scouler joined Tesco in 2002, rising to become commercial director in Hungary before returning to the UK as director of packaged foods in 2010. In 2012 he became UK commercial director in charge of all household, healthcare, baby and beauty products as well as packaged food, beer, wine and spirits, petrol and tobacco products.
In a Grocer story on his 2012 promotion, he was described as a “persuasive operator with a good understanding of the supplier side”.
Matt Simister, responsible for group sourcing
Simister was described as a “Tesco rising star” by Retail Week in 2012 for his work setting up the sourcing division. A business and marketing graduate from the University of Sheffield, Simister has worked as Tesco’s head of meat, fish and poultry and DIY, household and home utilities. He also spent three years as head of operations in the Czech Republic and Slovakia.
He hit the headlines in 2013 when he blamed Tesco’s customers and suppliers for wasting almost 60,000 tonnes of food a year.
