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October 8, 2015

Tesco and FSO in ‘secret talks’ to conclude accounting scandal

By Franchesca Hashemi

International retailer Tesco is understood to be discussing a deal with the UK’s Fraud Security Office (FSO) to end a yearlong investigation into the audit and accounting scandal that exposed a £326m ($443m) shortfall in profits.

Tesco is alleged to be in talks with the the UK fraud office about the possibility of signing a deferred prosecution agreement (DPA), according to a report from Sky News, which means the retailer could avoid immediate adjudication or sanctions by admitting wrong-doing and paying a fine as part of a court-approved deal.

DPAs were launched in the UK in February 2014 and are sometimes referred to as "plea deals". The legislation, which has routes in the US, gives prosecutors the power to suspend charges brought to companies only if a strict set of requirements are met.

The news of a potential DPA comes as Tesco reports a slump in underlying profits – £349m for the six months prior to 29 August 2015 – in comparison to £779m it made during the same time frame in 2014, marking a 55% drop.

However Tesco’s pre-tax profit came in at £74m, which is a marked success in contrast to the £19m reported for the same period in 2014.

Tesco has also announced the closure of 53 "unprofitable stores" in the UK since the start of 2014 and a reduced level of new store openings.

In September 2014, new chief executive of Tesco David Lewis ordered Freshfields and Deloitte to conduct an internal report of the company’s accounts. It was here the auditors found an initial £263m misstatement, although this number escalated to £326m as the audit continued.

The report made its way to FSO and Financial Conduct Authority, with the Financial Reporting Council launching a subsequent probe under the Accountancy Scheme in relation to the preparation, approval and audit of Tesco Plc’s financial statements.

Tesco then axed its audit firm of more than three decades, PwC, in May 2015 and offered the vacancy to Deloitte after it won the tendering process.

There has been no formal announcement as to when Tesco’s book keeping saga will conclude.

In a statement, David Lewis said there had been an "unprecedented" level of positive change in the business over the last twelve months.

 

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