The Financial Reporting Council (FRC) has confirmed that it is still weighing up whether to launch a full investigation into the Tesco accounting scandal.
The watchdog, which polices accountants and auditors, said it was giving careful consideration to information relating to the profit mis-statement revelations set out in Tesco’s annual results. Another City regulator, the Financial Conduct Authority (FCA), has already launched a formal investigation.
Tesco’s half-year update made grim reading for investors with pre-tax profits dropping 92% to just £112m after more than £500m of one-off costs, including those relating to the accounting issue, which dates back further than previously thought.
The retailer’s shares fell heavily on Thursday and resumed their decline on Friday as investors digested action taken by ratings agencies Fitch and Moody’s after the market closed last night. The pair announced they had downgraded the chain’s credit rating to just one notch above junk. On Friday the cost of insuring against Tesco defaulting on its debt shot up, with the spread on its credit default swaps – derivatives used to insure against a default – widening by 25%.
There was also a flurry of negative broker notes as analysts weighed up the limited strategy details revealed by Tesco’s new boss, Dave Lewis, and the group’s inability to produce a full-year profit forecast due to uncertainties about its future direction. The retailer’s shares have more than halved over the past year.
Last month Tesco drafted in Deloitte to comb through its books after a whistleblower identified an issue with the way the retailer booked payments from suppliers. The team of forensic accountants established that the estimate of first-half profits Tesco gave the City back in August had been artificially inflated by £263m, rather than the £250m originally estimated. Deloitte said £118m of the figure related to the first six months of the current financial year but that £145m related to previous years.
The inquiry triggered the suspension of eight senior executives, including Chris Bush, the head of the UK food business, and none have yet been reinstated.
Some analysts have speculated that increasingly desperate executives were pulling forward payments in order to paint a more flattering picture of the supermarket’s finances. Yesterday Lewis dismissed the idea that fraud was involved: “Nobody gained financially as a consequence of the overstatement of performance.”
To draw an accurate picture of Tesco’s finances, Deloitte demanded to see more than six million documents and scrutinised more than 700 supplier invoices. In its report Deloitte concluded that supplier payments had been pulled forward or deferred in a manner that was contrary to Tesco’s accounting policies. It also found there had been similar practices in prior reporting periods and that the sums pulled forward grew period by period. The report is being shared with the FCA and FRC.
The FRC said it would digest Thursday’s update and continue to gather information to determine whether it should take regulatory action.
