British financial watchdog to investigate Tesco accounting scandal

October 1, 2014
By

* Scandal has wiped 4 bln stg from Tesco (Xetra: 852647news) ‘s market value

* Shares (Berlin: DI6.BEnews) down 3 pct

* Could face further scrutiny from British lawmakers (Adds analyst comment, share price, background)

By Sarah Young

LONDON, Oct 1 (Reuters) – Britain’s financial watchdog haslaunched a full investigation into the Tesco accountingscandal that has now wiped 4 billion pounds ($4.9 billion) fromthe troubled grocer’s stock market value.

Tesco, Britain’s biggest grocer and the world’sthird-largest retailer, announced on Sept. 22 that it hadoverstated first-half profit by 250 million pounds – effectivelyits third profit warning in two months. .

The news of the Financial Conduct Authority investigationsent Tesco’s shares down 3 percent to 180 pence by 1011 GMT onWednesday. That was the stock’s lowest level since 2003, withthe price down 21 percent since the accounting mistake wasdisclosed.

“Tesco will continue to co-operate fully with the FCA andother relevant authorities considering this matter,” the companysaid in a statement.

The accounting error highlighted the scale of the challengefacing new Chief Executive Dave Lewis, who joined the95-year-old business on Sept. 1, three days after a previousprofit warning on Aug. 29.

“Such an investigation (by the FCA) can only be anotherdistraction for new CEO Dave Lewis and represents another blackmark on the board,” Shore Capital analyst Clive Black said.

FIREFIGHTING

Lewis is firefighting on multiple fronts. Industry datashows that Tesco is the worst performer of Britain’s so-calledBig Four grocers, which also includes Wal-Mart’s Asda,Sainsbury’s and Morrisons, with its marketshare dropping to 28.8 percent at Sept. 23 from 30.2 percent ayear earlier.

A two-decade run of uninterrupted earnings growth began tounravel as Tesco started losing British market share to Germandiscounters Aldi and Lidl, as well asupmarket rivals Waitrose and Marks & Spencer (Other OTC: MAKSFnews) .

The company’s shares, meanwhile, have lost half of theirvalue in the past 12 months, significantly underperformingBritain’s blue-chip FTSE 100 index, which is trading 2.3percent higher than a year ago.

Tesco, which has more then 500,000 employees, now has amarket capitalisation of 14.6 billion pounds, against nearly 19billion pounds before the accounting scandal emerged.

In the wake of the profit overstatement revelation, whichrelated to the mis-booking of rebate payments from suppliers,the company suspended four senior executives and launched itsown investigation, calling in forensic accountants and lawyers.

The company said in its statement that the FCA’sinvestigation will be in addition to the independent reviewalready being conducted by accountant Deloitte.

Further scrutiny of the grocer could also come from Britishlawmakers. The chairman of a parliamentary committee said lastweek that he might want to grill Tesco’s top executives aboutthe accounting scandal.

Separately on Wednesday rival supermarket chain Sainsbury’scut its full-year sales forecast after trading fell sharply inthe second quarter. (1 US dollar = 0.6174 British pound) (Editing by James Davey and David Goodman)

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