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Tesco pays £129m to settle Serious Fraud Office probe into accounting scandal

Tesco has settled a long-running investigation into its 2014 accounts - Nick Ansell/PA
Tesco has settled a long-running investigation into its 2014 accounts - Nick Ansell/PA

Tesco is to pay a £129m fine and £85m in compensation to shareholders to settle a probe by regulators into an accounting scandal.

The UK's biggest retailer said it had reached a Deferred Prosecution Agreement (DPA) with the Serious Fraud Office (SFO) regarding "historic accounting practices".

The deal means that Tesco will escape prosecution for the £263m black hole it discovered in its accounts in 2014, which later grew to £326m. At the time, the retailer admitted it had been booking income from suppliers early.

The company also announced it had agreed with the Financial Conduct Authority's finding of "market abuse" in relation to a trading statement released on August 29, 2014, which overstated the expected profits of the group as a result of its misaccounting. 

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Although the FCA will not levy a fine on the retailer, Tesco will pay compensation totalling £85m to shareholders who bought its stock between August 29, 2014 and September 19, 2014. This amounts to 24.5p per share plus interest.

Dave Lewis - Credit: Toby Melville/Reuters
Tesco's chief executive Dave Lewis was appointed shortly before the accounting scandal erupted Credit: Toby Melville/Reuters

Tesco expects to book a one-off charge of £235m in its accounts for the SFO penalty, compensation scheme and related costs.

Dave Lewis, the chief executive who took the reins at Tesco shortly before the accounting scandal erupted, said: "Over the last two and a half years, we have fully co-operated with this investigation into historic accounting practices, while at the same time fundamentally transforming our business.

Tesco share price

"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."

The agreement with the SFO concerns Tesco Stores and is not thought to cover a number of the supermarket giant's former employees who are still the subject of proceedings against them.

Tesco Trio | Who has been charged by the Serious Fraud Office?

Following the accounting scandal, Tesco plunged to a record annual loss of £6.4bn, while Mr Lewis embarked on a turnaround plan to sell off non-core parts of the business, including a number of overseas operations, as well as shaking up management and changing its relationship with suppliers.

Mr Lewis stressed that he wanted to "emphasise these issues are historic... since 2014 we've made extensive changes across our leadership, structures and to our financial controls inside the business".

However, Tesco still faces civil litigation from a £100m class action brought by 125 investors over the alleged breaches.

Mr Lewis said in response to the threat of more legal action: “The FCA is very clear that no one at Tesco Plc knew or should have known what was in the misleading statement, and that will be significant in the litigation.”

tesco timeline gallery

“It’s not for me to guess what the civil litigators will do, but they were not aware until this point of the compensation scheme. We’ll have to wait to see what those parties want to do, but we’ll be very committed in our defence.”

Clive Black, analyst at Shore Capital, said that Mr Lewis had "engaged in corporate wonders in keeping Tesco stable at the time of this crisis", adding that the settlement "brings to an end, hopefully, a damaging chapter for the business".

Deferred Prosecution Agreements | What do they mean?

Credit ratings agency Moody's said that the fine was "manageable in the context of Tesco's strong liquidity".

The supermarket returned to profit last year and has been growing its market share. It is now attempting a takeover of cash and carry wholesaler Booker.

"The supermarket can now put the whole sorry saga of mis-stating its profits back in 2014 behind it," added Neil Wilson, analyst at ETX Capital. "But it now has another fire to fight in the shape of a shareholder revolt over its proposed £3.7bn buy-out of Booker."

Two of Tesco's biggest shareholders have called on the supermarket to abandon its tie-up with the wholesaler and argued the move would destroy value.

Schroders and Artisan Partners, who together hold 9pc of Tesco, have argued that the supermarket risks destroying billions of pounds in shareholder value with an expensive distraction.

Mr Lewis said that Tesco remained “completely committed to the deal” and that he had talked to both investors. I’ve met tens of shareholders, literally here and in North America. And as I say, I repeat: I’m really pleased with the response that we’ve got.

The supermarket is due toreport its full-year results for 2016 on April 12.

Tesco will report its full-year results for 2016 on April 12.

Tesco buy Booker graphic

 

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