Tesco's Chairman to step down amidst financial black hole

Sir Richard Broadbent, Tesco's Chairman is stepping down from his role, as the retailer reported a 92 percent decline in pre-tax profits due to a larger than forecast accounting black hole of 263 million pounds. In an interim report published on Thursday, Tesco revealed that its first half year profits were

overstated by 263 million pounds, 13 million pounds more than the group's initial estimate of 250 million pounds. Tesco also reported a steep drop in its sales and profits for the first half of its financial year, with UK like-for-like sales declining 4.6 percent and pre-tax profits shrinking to 112 million pounds compared to the same period last year. Underlying profit prior to tax was 783 million, less than analysts predictions.

Tesco's half year profits overstated by 263 million pounds

The interim report comes after accountancy firm Deloitte completed its investigation into Tesco's profits and supports earlier speculation that misconduct concerning the groups financial results in relation to its commercial income had been going on for a long period of time. The investigation uncovered evidence that Tesco's profit were overstated by 118 million pounds in the first half of this year, by 70 million pounds during the financial year 2013-2014 and by 75 million pounds in the year prior to that.

According to the investigation, Tesco's profit overstatement involved a “small group” of employees, who were making deals with suppliers over promotions and then booking returns from the promotions ahead of time, whilst pushing back costs to the next financial period. Deloitte investigation findings are set to be passed on to the Financial Conduct Authority, and eight executives have been suspended since the misconduct was discovered.

Sir Broadbent expresses 'profound regret'

Following the interim report, Sir Broadbent, has revealed that he would step down from his role, although no date had been announced for his exit from the company. “The issues that have come to light over recent weeks are a matter of profound regret,” said Sir Broadbent in a statement. “A new management team is in place to address the root causes of the mis-statement and to develop and implement the actions that will build the company’s future. I am confident that the new Chief Executive and Chief Financial Officer will move rapidly and effectively in this respect.”

“Once this transition is complete and business plans are in place, it will mark the beginning of a new phase for the company and I will begin now to prepare the ground to ensure an orderly process for my own succession at that time. My decision reflects the important principle of accountability on behalf of the Board and will support the company to draw a line under the past as it enters the next phase of its development.”

Dave Lewis, Chief Executive at Tesco's is said to be considering a number of strategic options and potential assets sales, “in order to improve its competitive position and deliver sustainable returns.” Lewis, who took on his new role one month earlier than anticipated, said: “Our business is operating in challenging times. Trading conditions are tough and our underlying profitability is under pressure. We do however face these challenges from a position of market strength and I have been heartened by the team’s welcome and their determination to stay focused on doing the very best for our customers.”

“Whilst my review of the whole business continues, three immediate priorities are clear: to recover our competitiveness in the UK, to protect and strengthen our balance sheet and to begin the long journey back to building trust and transparency into our business and brand.”