Tesco Fined £129m For Accounting Scandal

Tesco has agreed to pay a fine of £129m to avoid prosecution for overstating its profits back in 2014, along with compensation to shareholders worth around £85m.

A statement issued by the retailer this morning said that its UK subsidiary, Tesco Stores Limited, had in principle reached a Deferred Prosecution Agreement (DPA) with the Serious Fraud Office (SFO) regarding its accounting practices which rocked the business and led to a major overhaul of its strategy and management team.

The proposed DPA was the subject of a preliminary court ruling yesterday, and the SFO and Tesco Stores Limited will now seek final judicial approval to the DPA from the court on 10 April 2017.

The DPA is a voluntary agreement under which Tesco Stores Limited will not be prosecuted provided the business fulfils certain requirements, including paying a financial penalty of £129m.

Tesco stated that its extensive programme of change had been recognised by the SFO in offering the DPA. This programme has included changes to its leadership, structures, financial controls, partnerships with suppliers, and the way the it buys and sells.

Meanwhile, Tesco also announced today that it has agreed with the UK Financial Conduct Authority (FCA) to a finding of “market abuse” in relation to a group trading statement announced on 29 August 2014. The statement overstated the company’s expected profits at that time and arose from the same accounting practices whereby the retailer had been booking income from suppliers early.

Tesco has agreed with the FCA to establish a compensation scheme which will compensate certain net purchasers of its ordinary shares and listed bonds who purchased those securities for cash between 29 August 2014 and 19 September 2014. The cost of the compensation scheme is estimated by both Tesco and the FCA to be in the region of £85m. There is no penalty being levied by the FCA on Tesco.

Andrew Bailey, Chief Executive of the FCA, said: “Dissemination of information that gives a false or misleading impression as to traded securities harms the integrity of our markets. The FCA is committed to UK markets being fair, transparent and thus competitive. Tesco and its board are doing the right thing here, taking appropriate responsibility and agreeing to rectify the consequences of the misconduct. They have cooperated fully with us and this sets a good example for the market and so is a good outcome for Tesco and investors.”

Tesco said it expects to take an exceptional charge of £235m in respect of the penalty, compensation scheme and related costs. This will be booked as an adjusting post balance sheet event in its 16/17 accounts which are due to be published next month.

Dave Lewis, Tesco Group Chief Executive, commented: “Over the last two and a half years, we have fully cooperated with this investigation into historic accounting practices, while at the same time fundamentally transforming our business. We sincerely regret the issues which occurred in 2014 and we are committed to doing everything we can to continue to restore trust in our business and brand.”

NAM Implications:
  • A great opportunity for Tesco to lead in driving for definition, KPIs and standardisation of Trade Investment ‘buckets’.