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Tesco has agreed to pay a fine of £129m to avoid prosecution for overstating its profits in 2014.

Its subsidiary, Tesco Stores Ltd, reached what's known as a deferred prosecution agreement with the Serious Fraud Office after a two-year probe.

Tesco said there was "regret" over the issues of 2014 and said it has been working hard to "restore trust".

The firm also agreed with the Financial Conduct Authority (FCA) to spend £85m on compensating investors.

The money will go to those who bought shares or bonds between 29 August and 19 September in 2014.

Investors misled

Those investors would have had misleading information from a trading statement on 29 August, which gave a rosier assessment of its performance than was actually the case.

Tesco issued a corrected statement before the markets opened on Monday 22 September, which estimated it had overstated profits by about £250m.

The revelation sent the retailer's share price plunging and sparked two internal inquiries.

Even that was not the full story, the overstatement was subsequently revised up to £326m.

'Regret'

The compensation order is a first for the FCA, although it has not imposed its own penalty, and Tesco has accepted the regulator's finding of "market abuse".

The SFO said Tesco had co-operated with the investigation and had undergone an "extensive" period of change.

Tesco's current chief executive, Dave Lewis, said: "Over the last two-and-a-half years, we have fully co-operated with this investigation into historic accounting practices, while at the same time fundamentally transforming our business.

"We sincerely regret the issues which occurred in 2014 and we are committed to doing everything we can to continue to restore trust in our business and brand."

Analysis, Simon Jack, business editor

A Deferred Prosecution Agreement (DPA) is a fairly new way (introduced in February 2014) of punishing a company for criminal behaviour without the collateral damage of a conviction.

DPAs may be fairly new, but they are instruments the SFO is warming to. Just last month it announced a DPA with Rolls-Royce which saw the company pay a UK fine of £500m. In that case, the judge agreed that a criminal conviction for the company could disbar it from securing contracts - particularly in the US - which in turn could threaten the jobs of thousands of UK workers.

A DPA also avoids lengthy and costly trials and puts the offending company on probation to ensure full co-operation in the future.

It also does NOT mean that individuals escape scot free while shareholders pay the price for their conduct. Three former executives from Tesco face criminal proceedings. The SFO also quizzed the former chief executive Phil Clarke, before dropping any further action against him.

Read more from Simon here:

The DPA with Tesco Stores still needs approval by the High Court, which is scheduled to make its decision on 10 April.

This potential DPA agreement only covers Tesco Stores and does not address whether liability of any sort applies to the larger international group Tesco plc or any of its employees.

To pay for the penalty, compensation scheme and related costs Tesco will charge £235m to its results for the 2016-17 financial year, which are due to be published on 12 April.

Tesco shares were little moved on Tuesday.

Laith Khalaf, senior analyst, at Hargreaves Lansdown stockbrokers, said the accounting error uncovered was "exceptionally rare" in the UK stock market.

"This is a big slap on the wrist for Tesco, reflecting the seriousness of the offence and its impact on the share price in 2014," he said.

"Dave Lewis underwent a baptism of fire when he took over as CEO in 2014, just as the accounting scandal struck. He and the supermarket will now be hoping to draw a line under the matter, and concentrate on nurturing Tesco's nascent recovery.

Analysis, Ian Pollock, personal finance reporter

The Tesco scandal contains a real novelty. It is a compensation scheme for about 10,000 professional and personal investors.

They bought shares or bonds at artificially inflated values after the supermarket group put out its misleading trading statement on 29 August 2014. They suffered a loss if they were still holding those investments, when their values fell, after a correction from the company was issued a few weeks later on 22 September.

To qualify, you have to be a so-called "net purchaser" - someone who during that period bought more shares or bonds than they sold.

The compensation is 24.5p per share, plus interest. Various values, plus interest, are on offer to bond holders.

The compensation scheme will be run by the accountancy firm KPMG, and should start before the end of August this year.

KPMG will try to contact all eligible claimants. If you are one of them you will need to provide evidence of your purchases and any sales.

You will have six months to lodge a claim.

Details are available from Tesco.

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Tesco fined £129m for overstating profits

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Tesco has agreed to pay a fine of £129m to avoid prosecution for overstating its profits in 2014. Its subsidiary, Tesco Stores Ltd, reached what's known as a deferred prosecution agreement with the Serious Fraud Office after a two-year probe. Tesco said there was "regret" over the issues of 2014 and said it has been working hard to "restore trust".

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But Mr Johnson had one major problem: the financial world was on its knees. It was less than two months since Lehman Brothers had collapsed in the US. Just four weeks earlier Royal Bank of Scotland and Lloyds had received multi-billion pound cash injections from the UK Government. No one knew when the aftershocks would stop.

Mr Johnson had presented Woolworths' syndicate of 10 banks with a radical plan to sell Woolworths' 807 stores to turnaround specialist Hilco and dispose of its 40pc stake in the 2entertain video publishing joint venture with the BBC. He would use the bit that was left - the 'Entertainment UK' CD and DVD wholesale arm - to turn Woolworths into a major distribution and logistics business. All that he needed was for the banks to back him.

"The world was in meltdown. There were bankers involved who didn't know whether their banks would be there in a month, let alone if they wanted to invest in a small company like Woolworths," said one insider.

Over the next week the banking syndicate, which was led by GMAC and Burdale Financial, a division of the Bank of Ireland, decided that there were too many uncertainties in Mr Johnson's restructuring plan. On Wednesday November 26, the board voted that administration for the high street chain and Entertainment UK was the only option. Mr Johnson's plan was in tatters and the company folded.

Woolworths' collapse almost one year ago was one of the defining events of the credit crisis. Not only did it result in one of the UK's best-known names disappearing from the high street, it also resulted in almost 30,000 job losses.

But questions have been asked about whether Woolworths' failure can purely be put down to a brutal recession.

The company's collapse provides a snapshot of how the controversial insolvency process in the UK works. It raises questions about the role of advisers, as well as decisions taken by Woolworths executives. Some former executives have questioned the role of Deloitte, the accountancy group that advised Woolworths banks before the collapse and then acted as administrator after the company failed, garnering huge fees in the process.

This weekend, speaking for the first time publicly since the collapse, Mr Johnson and Richard North, Woolworths' chairman at the time of its failure, argue that Deloitte's dual role represents a "clear potential conflict of interest" and claim that had the banks supported their plans, jobs would have been saved.

Deloitte denies there was a conflict of interest and says that Woolworths failed because it was losing money and had no cash.

The argument goes to the heart of insolvency procedures in the UK. Last week the Office of Fair Trading (OFT) launched an investigation into the corporate insolvency market. As part of this it will look at the appointment process for insolvency practitioners. While Deloitte was acting well within established insolvency practices, many observers believe there was a chance that Woolworths could have been saved.

So what happened at Woolworths?

Richard North became chairman of Woolworths Group on June 6 2007. The former boss of Intercontinental Hotels with a passing resemblance to former Prime Minister John Major, felt that the company needed a change of direction.

The chain was in a precarious position. Its 800 stores were saddled with a punchy rent bill of £150m a year and its more onerous leases were rising
by 2.5pc every year. This meant that sales had to rise by 4pc a year just for it to stand still.

But the opposite was happening. Sales were falling. Although margins were rising, Mr North thought that long-standing and popular chief executive Trevor Bish-Jones's steady-as-she-goes strategy was going nowhere.

Mr North commissioned some research. It showed that on-shelf availability, a key measure in retail of the amount of stock on offer, was just 73pc. At the same time Woolworths' ranges were too broad. For example it was stocking more than 40 types of pencil case. The company had spent £100m doing up its dowdy stores, but was it really getting anywhere?

In any case, the shops were only half of the business. Woolworths also owned the Entertainment UK (EUK) wholesale arm and part of the 2entertain joint venture with the BBC.

In March 2006 EUK had been knocked when it lost the majority of a lucrative contract to supply CDs and DVDs to Tesco. It fought back, winning contracts from chains including Asda, Marks & Spencer and Zavvi, the record chain previously known as Virgin Megastores. The only glitch was that EUK's business model needed large amounts of cash to function. EUK paid some of its own suppliers in 30 days but got paid itself in 60 days. The company had to fill this working capital gap itself. An ironic side effect was that the more CDs EUK sold, the more cash it needed.

So that was Woolworths: an expensive and stagnating retail business tied bizarrely to a successful but cash-hungry DVD wholesaler.

Its cash-intensive nature meant that Woolworths was in danger of breaching its banking covenants. So Mr North and Mr Bish-Jones set about refinancing the company, with help from KPMG. The result in early 2008 was a four-year £385m facility, secured against Woolworths' stock. The essential money was provided by a syndicate of banks, led by Burdale and GMAC. Mr North also brought in consultants LEK to help on strategy. He decided that a break-up of the group was the most sensible option for shareholders. He asked UBS, Woolworths' financial adviser, to put feelers out.

Offers were forthcoming. In late 2007 Woolworths had an offer of around £200m for EUK from a private equity group, and in October 2007 Baugur, the Icelandic investor that had a stake in Woolworths, made an offer for the retail arm for £125m. The offers came to nothing. Then in February 2008 Mr North received the BBC's permission to sell Woolworths' 40pc stake in 2entertain. In the summer of 2008 Malcolm Walker, the boss of the Iceland chain, also owned by Baugur, offered Mr North £50m for Woolworths' shops. But this offer would have left the rump of Woolworths holding the debt - debt that was secured against stock that the company would no longer own. Nothing happened on either front. It was missed opportunities all round.

Meanwhile, big changes were also occurring inside Woolworths.

In June 2008 Mr North said that Mr Bish-Jones would be leaving. Mr Johnson arrived in September with the remit to urgently restructure the company in a way that satisfied its board, bankers and shareholders. There was a growing feeling among some executives that if Woolworths' shops were to survive, then some kind of insolvency process was going to be necessary.

Mr Johnson believed that the chain needed 350 stores not 807. He told friends that Woolworths was merely delaying the point of death by ploughing on in its present form. He planned to restructure the company and embarked on an intense cost-cutting drive to save £200m to allow the chain to trade through Christmas.

Meanwhile the deteriorating state of the economy was worrying the chain's credit insurers. Credit insurers are an obscure but vital part of any supply chain - they insure manufacturers against non-payment by retailers. Over the summer of 2008 a large proportion of Woolworths' 20 credit insurers stopped insuring its suppliers for fear that they would not be paid by the retailer. The meant that Woolworths had to pay its suppliers up front, rather than after the goods had been sold. This setback cost £200m and decimated crucial cash flow reserves.

"Ultimately it was the credit insurance issue that bought the business down," said one observer.

By late autumn it was clear that Woolworths was unlikely to survive long enough for Mr Johnson to put his plan in place, so he devised a Plan B: an immediate break-up of the company involving selling the stores to Hilco and the 2entertain stake to the BBC, and turning Woolworths into a distribution and logistics company. It was this plan that Mr Johnson put to the bankers last autumn.

And this is where the contention lies.

The syndicate of bankers on whom Woolworths relied for funding had drafted in Deloitte to advise it. To the surprise of the Woolworths board, Deloitte advised the banks against backing Mr Johnson's emergency plan. The board knew that daily cash flow, sales and debt levels were fluctuating but they had hoped for support.

"When they rejected Plan B we had to accept that we couldn't trade on and we had to go into administration," said an insider.

But here was the rub. It was Deloitte that was lined up as administrator. In the eyes of Woolworths' board, Deloitte was playing the role of both executioner and undertaker. Further, the company that Woolworths had lined up to buy its stores - Hilco - had been lined up to run the closing-down sales by Deloitte.

The board was incandescent. Some claimed that Deloitte might have advised the banks to opt for administration because it could earn higher fees as the administrator. Deloitte has earned over £3.8m in fees to date from liquidating the company. It also charged £84,000 of expenses to the banks that appointed it.

Mr Johnson believes that the rules governing insolvencies must be reviewed: "It is unsatisfactory that advisers to banking groups on their options can then become administrators."

Mr North agrees. "There is manifestly a conflict of interest when the accountants providing advice to banks on whether a company should go into administration then act as the administrator," he said.

Mr Johnson believes that the chain could have been saved.

Deloitte's Neville Kahn, who acted as Woolworths' administrator, has a different version of events. He says that Woolworths failed because it was making vast losses and ran out of money. He said that it was the company's directors who actually voted to appoint Deloitte as administrator, not the banks.

"The banks did not appoint administrators to Woolworths, the directors did," he said. He believes the fees issue has nothing to do with Woolworths' demise. "Certainly no decision was made on the basis of any fees."

He added: "The reason that Woolworths failed was because it was making substantial losses." A look at the company's books makes it hard to argue with this point of view.

The collapse of Woolworths led the news bulletins on the evening of November 26. To survive, the business needed a fair wind. It did not get one.

On December 11 Deloitte announced closing down sales at Woolworths' stores. The shops were besieged. Mr Johnson apparently joked to friends: "In September I took over the country's least popular retailer and by November it had become the most popular."

The implications went way beyond Woolworths' shops; millions of pounds-worth of EUK's books, CDs and DVDs destined for third party chains like Asda or Zavvi were stuck in warehouses gathering dust.

There followed an appalling month on the high street. Whittard of Chelsea, The Officers Club and Zavvi were just some of the chains that also collapsed into administration before Christmas, although some were bought out in controversial so-called 'pre-pack' deals.

Woolworths' loss has been most keenly felt in market towns, where it was often at the heart of the community.

Mr Johnson says it was part of the fabric of UK life: "Woolworths was probably the biggest administration in the UK for a very long time. It was a highly visible chain and there were lots of stories attached to it."

In the aftermath of the collapse, there was almost universal condemnation at what had happened.

Ardeshir Naghshineh, the Iranian property entrepreneur who was Woolworths' largest shareholder, said that it was a "terrible shame that money is being found'' to pay Deloitte and Hilco, Woolworths' administrator and its adviser, "while 30,000 staff are losing their jobs''.

Sir Geoff Mulcahy, the former chief executive of Kingfisher and the man who ran Woolworths for two decades, thought "this can't be happening" when he heard of the collapse.

"I know it sounds old hat but I think that businesses do have some kind of social responsibility," he said last week.

The void on the UK's high streets left by Woolworths' collapse has been predominantly filled
by pound stores and discount retailers, in a stark indication of how the credit crisis has reshaped the retail industry.

Almost 40pc of all the Woolworths stores that have been let or are under offer since the chain collapsed have gone to pound stores and just under a third have gone to supermarkets, according to recent research by CBRE, the property company. At the last count, there were still hundreds standing empty.

Parts of the brand have been successfully revived. Earlier this year the Woolworths name was bought by Shop Direct Group, the online and catalogue retailer owned by Sir David and Sir Frederick Barclay, who also own Telegraph Media Group, owners of The Daily and Sunday Telegraph.

Some observers believe that the ripples from Woolworths' collapse will continue into 2010 as the recession claims more retailers.

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Woolworths: the failed struggle to save a retail giant

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But Mr Johnson had one major problem: the financial world was on its knees. It was less than two months since Lehman Brothers had collapsed in the US. Just four weeks earlier Royal Bank of Scotland and Lloyds had received multi-billion pound cash injections from the UK Government.