Three former Tesco directors plead not guilty to charges of fraud and false accounting - DAC Beachcroft

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Three former Tesco directors plead not guilty to charges of fraud and false accounting

Published On: 3 October 2016

In January 2016, we provided an update about a number of issues Tesco Plc ("Tesco") were facing following:

  • the findings of the Groceries Code Adjudicator in January 2016 that Tesco had falsely inflated its profits by knowingly delaying and deducting payments from suppliers in order to improve its own financial position; and
  • the investigation launched by the SFO in October 2014 into accounting practices at Tesco after the company admitted it had incorrectly accounted for suppliers payments following findings by Deloitte that Tesco had artificially inflated an estimate of first half year profits in August 2014, said to amount to some £263m.

Tesco's admission led to it reporting its biggest ever loss of £6.4bn for the year to February 2015. Things have not improved for Tesco in the intervening months and they continue to face a very uncertain period.

The SFO investigation into their accounting practices is ongoing and further charges may be brought. In addition to the artificially inflated profits for the first half year to August 2014, Deloitte, accountants instructed by Tesco to undertake an investigation of its accounting practices, found that similar practices had been in place in prior accounting periods. Indeed, in April 2015 Tesco confirmed that it had identified a further £60m in misstatements from prior years, mostly as a result of an audit of its Irish operations. It is uncertain whether any corporate prosecution may follow which is punishable by a fine and whether in this case a deferred prosecution agreement would be negotiated.

Most recently, and as a result of these activities, on 9 September 2016, charges have been brought against three former directors of Tesco. Subsequently, on 22 September 2016, Carl Roberg, the former finance director of Tesco, Christopher Bush, the former Managing Director and John Scouler, the former commercial director for food (together the Directors'") appeared at Westminster Magistrates Court to answer charges of fraud and false accounting in relation to overstated accounts for the six months to 23 August 2014.

All Directors were charged with one charge of fraud by abuse of position for personal gain and one charge of false accounting. The Directors were also accused of dishonestly falsifying Tesco's digital accounting records and its draft interim accounts by the "inputting of and/or reliance upon commercial income figures which gave a false account of the financial position of Tesco." If found guilty of fraud by abuse of position, the Directors could face up to 10 years in jail and seven years for false accounting.

The Directors' all pleaded not guilty to the activity which allegedly took place between February to September 2014. The case was referred to the Southwark Crown Court where they will appear on 20 October 2016. All the Directors are currently deny and wrongdoing and are contesting the allegations made against them.

The Directors all worked for the former Chief Executive of Tesco, Philip Clarke, who in the course of the SFO investigation has been questioned but no charges have yet been brought against him. Previously, the FRC had announced an investigation of Tesco's former chief financial officer Laurie Mcilwee in December 2014 but on 31 August 2016, the investigation was closed because there was no realistic prospect that a tribunal would make an adverse finding in relation to his conduct.

We understand that the FRC is continuing its investigation into the work undertaken by PwC, as external auditor for Tesco, predicated upon the preparation, approval and audit of the financial statements for the years ended 25 February 2012, 23 February 2013, and 22 February 2014 and it is not known when this is likely to be concluded or if PWC and/or any individuals will face disciplinary action.

Reports in the press also continue and suggest that groups of Tesco's shareholders both in England and in the US propose to commence proceedings for compensation for losses allegedly incurred as a result of the overstatement and that the English shareholders may have already been in communication with Tesco direct in relation to their claims. It is understood that the English shareholders are being backed by Bentham Europe, a company which specialises in litigation funding.

Comment

Although Tesco's share price edges upward and the company is undertaking significant changes, these are uncertain times and with the SFO investigation proceeding it is not known if further charges will be brought against Tesco employees. The current charges against the Directors have, however, been made relatively soon after the commencement of the SFO investigation which has no doubt been assisted by the additional £21m of funding made available by the government in January 2016 to assist them in pursuing complex cases. In this regard, it is reported that the SFO is currently conducting investigations into the affairs of Tata Steel, Airbus, GlaxoSmithKline, Rolls-Royce and Barclays.

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