A leading accounting professor has warned that Tesco could face a hefty fine from the UK regulator, but avoid court proceedings, after it revealed that it overstated its profit by £250m.
According to Warwick Business School's Professor of Accounting Crawford Spence in a statement, the British retailer was caught out by using seemingly aggressive accountancy methods, but since it is launching an internal review and suspended four members of staff, it likely to avoid costly litigation procedures through the courts.
"To Tesco's credit, however, it has flagged this up internally and is doing something about it, which suggests that there are probably no other big accounting shocks hidden away," said Spence about Tesco, which has since announced that it will launch an internal investigation with accountancy firm Deloitte.
Law firm Freshfields is also enlisted to get to the bottom of the mess.
"Given it has been flagged up and dealt with this internally it is unlikely any court proceedings will occur. Tesco could be fined by the authorities, but they will most likely wait to hear what the auditors, Deloitte, uncover first."
However, Spence added that what Tesco has done is not unusual but the scope and scale of the accounting error is damaging.
"This revelation should be interpreted as a sign of distress. Tesco has essentially tried to recognise revenue too early and delay the recording of costs until a later date," said Spence.
"Accounting is not a hard science and some of this behaviour is acceptable, within limits. What Tesco appear to have done is push the boat out a bit too far, ending up with revenue that hadn't really been earned yet and costs that probably should have been booked earlier.
"It is a classic 'earnings management' issue. Firms quite legitimately play around with their revenue and expenses all the time. However, when they do so aggressively, as Tesco appear to have done, this is usually because the firm is under pressure elsewhere. In Tesco's case, it has been losing market share to its competitors steadily in recent years and losing value quite dramatically in its share price in recent months.
"Rather than fix the underlying problems, they have been playing around with their numbers to try to make things look better."
Tesco shares are down around 7% at 212.85p after initially plunging 11% on market open. The Tesco stock price is currently down 36% year-to-date.