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Tesco execs suspended over £250m profit overstatement

British supermarket giant Tesco has suspended four executives, including its UK managing director, after the retailer overstated its half-year profit guidance by £250m.

It has launched an investigation - headed by audit company Deloitte - and says it is working to establish the impact of the issue on its full-year results.

"We have uncovered a serious issue and responded accordingly," Tesco chief executive Dave Lewis told the BBC.

Commenting on the reporting error, Professor of Accounting at Warwick Business School Crawford Spence said: “This revelation should be interpreted as a sign of distress. Tesco has essentially tried to recognise revenue too early and delay the recording of costs until a later date. Accounting is not a hard science and some of this behaviour is acceptable, within limits. What Tesco appear to have done is push the boat out a bit too far, ending up with revenue that hadn't really been earned yet and costs that probably should have been booked earlier.

 “It is a classic 'earnings management' issue. Firms quite legitimately play around with their revenue and expenses all the time. However, when they do so aggressively, as Tesco appear to have done, this is usually because the firm is under pressure elsewhere. In Tesco's case, it has been losing market share to its competitors steadily in recent years and losing value quite dramatically in its share price in recent months. Rather than fix the underlying problems, they have been playing around with their numbers to try to make things look better.

“To Tesco’s credit, however, it has flagged this up internally and is doing something about it, which suggests that there are probably no other big accounting shocks hidden away.

“Given it this has been flagged up and dealt with internally it is unlikely any court proceedings will occur. Tesco could be fined by the authorities, but they will most likely wait to hear what the auditors, Deloitte, uncover first.”

Europe | Business ethics

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