Tesco faces FCA investigation on overstatement of profit

Tesco Plc is under investigation by the Financial Conduct Authority for overstating its first-half profit estimate.

The grocer announced the regulator's probe a week after disclosing the forecast was overstated by 250 million pounds ($405 million) and suspending four executives. Shares plunged today to their lowest in more than 11 years.

Tesco will “continue to cooperate fully with the FCA and other relevant authorities considering this matter,” the Cheshunt, England-based company said today in a statement.

The Financial Reporting Council, which can force companies to restate their accounts, is also looking into the matter, announced a month after the U.K.'s biggest retailer welcomed a new chief executive officer, Dave Lewis. Chief Financial Officer Alan Stewart is just entering his second week on the job.

The grocer's stock declined as much as 3.7 percent and was down 3.5 percent at 179.60 pence as of 11:37 a.m. in London.

The FCA has a range of enforcement powers including fines and criminal prosecutions. Most cases start on the premise the investigation could be either civil or criminal. A decision isn't made until enough evidence is gathered to determine which is the appropriate route. The agency can prosecute companies or their employees for offenses including market abuse, such as insider dealing, or breaching rules for publicly traded entities.

Falling Sales

While most FCA actions target financial companies, JJB Sports Plc was fined 455,000 pounds by the regulator in 2011 and Photo-Me International Plc penalized 500,000 pounds in 2010. Both were faulted for failing to publicly disclose pertinent information to the market.

Tesco income was booked before being earned and some costs were recognized later than they were incurred, the grocer said on Sept. 22.

Tesco is also weighed down by the steepest sales decline in more than two decades. Its domestic market share declined to 28.8 percent in the 12 weeks ended Sept. 14 from 30.2 percent a year earlier, according to researcher Kantar Worldpanel. The company, along with other mainline U.K. grocers, has lost share to discounters Aldi and Lidl as Britons seek lower prices.

Tesco moved up Stewart's start date to handle the fallout. Former CFO Laurie McIlwee wasn't required to work the final six months of his contract, covering most of the period under investigation. McIlwee resigned amid reports of disagreements with CEO Philip Clarke, who subsequently was ousted.

The company hired Deloitte LLP and Freshfields Bruckhaus Deringer LLP for an independent review.