Tesco in danger of £500m accounting scandal fine, says Cantor

Tesco may be slapped with a fine of up to £500m by the Serious Fraud Office over its £326m accounting black hole, according to Cantor Fitzgerald analyst Mike Dennis.

He said the SFO’s findings, possible fines and trading restrictions on Tesco, after an investigation launched in 2014, are due to be announced this week.

Dennis said the SFO could fine Tesco more than 1% of its UK grocery sales (£350m-plus) and force the group to repay suppliers £100m of cash payments over several years, as well as identify individuals for prosecution.

“We believe, this in turn could open the way for shareholder redress.”

He noted that Tesco's previous auditors, PwC, said “accounting for the amount and timing of recognition of commercial income may require the exercise of judgement” or in the case of Tesco's management and accountants a lack of judgement between contractual payments and illegal demands.

“The point is that maybe the SFO has calculated, like we have, that Tesco UK's 'back margin' supplier allowances grew by £1.7bn over the last five years to £2.4bn by February 2014 and accounted for 30% of Tesco's total cash profit, having previously only been around 25.

“£1.7bn or more is a lot of additional cash payments over a five year period of falling LFL sales volumes.”

Dennis said the SFO should realise the 'back margin' payments received by Tesco were probably only a fraction of the total actually demanded, meaning the scope of the fraud is far greater, covering more categories than first thought.

'Back margin' is cash provided by suppliers in return for preferential treatment in store layouts and promotions.

In 2014, Tesco suspended four of its executives after the company uncovered an accounting issue that led it to overstate its half year profit guidance by £250m.

Tesco's chief executive Dave Lewis said at the time that he had found out profits were overstated as a result of the "accelerated recognition of commercial income and delayed accrual of costs" - or to put it simply, the company was booking profits from suppliers before costs.

At 1444 GMT, Tesco shares were down 2.5% to 156.70p.