Tesco could face problems in the build up to the busy Christmas period

Tesco could face problems in the build up to the busy Christmas period

The audit report of Tesco's commercial teams could, analysts believe, create operational paralysis for Tesco ahead of the very busy Christmas build-up.

According to Cantor Fitzgerald analyst Mike Dennis, the report, which is the result of a GBP250m (U$408.1m) profit overstatement, could bring out a lot more issues for Tesco and the industry than it ultimately solves.

"On one hand, the positive is that the GBP250m over statement in H1/15E is a phasing issue accelerating profits into an earlier period that should not change future profits or the potential for a recovery, but on the other hand, the forensic investigation could, in our view, create operational paralysis for Tesco ahead of the very busy Christmas build up," he noted.

"We believe the investigation requires all commercial department personnel to hand over communication systems (laptops) to be interrogated and all supplier meetings to be postponed then, we believe Tesco's ability to operate could be compromised at a critical period ahead of the start of the build up to Christmas trading."

Worse still, Dennis points out that, if the auditors and lawyers uncover a history of malpractice going back many more years, then the investigation could go on longer and involve many more companies.

"The risk now is that any discovery of side payments or questioning around the timing of invalid deductions and repayment to suppliers around reporting periods could lead to a wider investigation and legal action, with the consequence of further reputational and financial risk to Tesco's profitability and brand equity."

Full disclosure of the misrepresentation of accounts is expected on 23 October. In the meantime, the retailer's share price continues to fall. It was down 1.48% to 182.52 pence at 11:21 BST today.

Tesco is understood to have suspended a fifth senior executive since the accounting mishap was revealed last month.

Group commercial director Kevin Grace is said to have been let go, according to Sky News, as an investigation is carried out by the Financial Conduct Authority (FCA) over the deficit.

Tesco has so far suspended four senior executives over the issue, one of those being Chris Bush, the head of its UK business. It has, however, appointed two non-executive members to its board of directors, adding what analysts believe is much needed international consumer market experience for the struggling supermarket group.

Richard Cousins, CEO of Compass Group, and Mikael Ohlsson, the former CEO and president of Ikea, will both join the board on 1 November.

Reports today, however, suggested Ken Hanna, the chairman of Tesco's audit committee is set to step aside as a non-executive director, and long-standing company secretary, Jonathan Lloyd, has resigned. The retailer did not return a request for confirmation.

Shore Capital analyst Clive Black, however, belives that such change is "hardly surprising given all that has been going on within the group in recent months". He added: "We would expect further board evolution in due course, most probably including the appointment of a new chairman in time."

Indeed, reports last week suggestd chairman Richard Broadbent is considering stepping down from his role, as a result of the internal review and regulator investigation.

"The remarkable series of events that has unfolded at Tesco makes for a lot of investor interest in the interim results due on the 23 October where we, somewhat in trepidation, look for ]around] GBP727m of pre-tax profit (FY2014A; GBP1.47bn)," Black noted.

"That Tesco’s board is undergoing such upheaval is far from ideal for new CEO, Dave Lewis, as he seeks to stabilise a large ship that is materially listing. However, one silver lining from this situation may be that necessary management change will take place more rapidly and solutions to the group’s problems therefore could emerge more quickly too. In this respect we have welcomed the appointment of Richard Cousins and Mikael Ohlsson as new non-executive directors to the board," he added.