Tesco chairman under pressure after board rejected warnings from auditors

According to The Telegraph, Tesco’s auditor, PwC, warned in the company’s annual report in May that it was concerned about how income from commercial deals with suppliers was recognized. It listed the issue as its primary are of focus “because of the judgement required in accounting for the commercial income deals and the risk of manipulation of these balances”.

Ken Hanna, chairman of Tesco’s audit committee, responded, saying: “The committee notes that commercial income was an area of focus for the external auditors based on their assessment of gross risks. It is the committee’s view that while commercial income is a significant income for the group and involves an element of judgment, management operates an appropriate control environment which minimises risks in this area. As a result, the committee does not consider that this is a significant issue for disclosure in its report.”

Tesco shocked the City yesterday by suspending four directors and revealing it had discovered pre-tax profits for the last six months have been overstated by £250m.

It has also emerged that broker Cantor Fitzgerald analyst Mike Dennis received a string of legal threats from Tesco over research last year where he argued that the grocer was deducting money from suppliers’ trading accounts or extending payment dates without notice to bolster its quarterly earnings. Dennis told The Times: “This is a commercial trading department increasingly acting in an inappropriate and arrogant way in its dealing with suppliers.”

Dennis questioned how the retailer could report a steady profit margin while till receipts in stores were falling and costs rising.

Tesco has now tasked Deloitte to lead a full investigation, with its lawyers Freshfields.

Broadbent insisted yesterday he would not resign over the accounting issue, and said: “Shareholders will have to decide whether I am part of the problem or part of the solution.”