Profit and accounting errors to cost Tesco over £235m
Published:  28 March, 2017

Tesco faces bills of over £235m after false accounting practices  led to overstating profits in its 29 August 2014 trading statement, but will avoid prosecution.

The payments would consist of a fine of £129m, proposed by the Serious Fraud Office (SFO), plus SFO costs for the investigation, levelled at Tesco Stores Ltd and agreed in principle at a preliminary court ruling yesterday (27 March).

The overall bill also includes shareholder compensation of about £85m, excluding interest, following an FCA finding of market abuse, according to Tesco.

The fine and costs proposed by the SFO under the terms of the Deferred Prosecution Agreement (DPA) now need to be approved by Southwark Crown Court at a public hearing on 10 April 2017 to become effective.

The hearing will take place at 10am on Monday, 10 April before Sir Brian Leveson QC, president of the Queen’s Bench Division, sitting at the Royal Courts of Justice.

The SFO stressed that the DPA only concerned the potential criminal liability of Tesco Stores Limited and did not address whether liability of any sort attached to Tesco PLC or any employee or agent of Tesco PLC or Tesco Stores Ltd.

Separately, the trial of three individuals will take place at Southwark Crown Court on 4 September 2017 under the Contempt of Court Act 1981.

In a statement following the SFO announcement, Tesco said: "The DPA relates to false accounting by Tesco PLC’s subsidiary, Tesco Stores Limited, between February 2014 and September 2014. 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.  

Over the last two and a half years, Tesco PLC has fully cooperated with the investigation and undertaken an extensive programme of change, which the SFO has recognised in offering the DPA. This programme includes extensive changes to leadership, structures, financial controls, partnerships with suppliers, and the way the business buys and sells."

Tesco also said that the FCA had expressly stated that "it was not suggesting that the Tesco PLC board of directors knew, or could reasonably be expected to have known, that the information contained in that trading statement was false or misleading".

Tesco PLC has agreed with the FCA to compensate certain net purchasers of Tesco ordinary shares and listed bonds who purchased those securities for cash between 29 August 2014 and 19 September 2014 (inclusive).

Each net purchaser of shares would be entitled to compensation of 24.5p per share purchased, plus interest at 1.25% per annum if the net purchaser is an institutional investor or 4% per annum if the net purchaser is a retail investor, in each case with such interest running from 19 September 2014 until approximately 4 months after the opening of the scheme.

"The cost of the compensation payable is estimated by both Tesco and the FCA to be in the region of £85m excluding interest," said Tesco in its statement. "Tesco has appointed KPMG to administer the compensation scheme, with oversight from the FCA. A further announcement will be made when KPMG has completed the preparations required to open and operate the scheme, which is expected to be before the end of August 2017."

There is no penalty being levied by the FCA on Tesco.

Subject to approval by the court and compliance with the terms of the DPA, this concludes the SFO’s investigation into Tesco. It also concludes the FCA’s proceedings in relation to this matter in respect of Tesco. The group 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 16/17.

Dave Lewis, Tesco group chief executive, said: “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.”

In a statement, the SFO said: "... If approved, the DPA will result in Tesco Stores Ltd paying both a financial penalty of £128,992,500 and the SFO’s full costs.

"This potential DPA with Tesco Stores Limited does not address whether liability of any sort attaches to Tesco PLC or any employee or agent of Tesco PLC or Tesco Stores Ltd."