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Tesco accounting probe finds 'inappropriate behavior' by staff: reports

Pedestrians walk past a Tesco store in Bow, east London August 29, 2014. REUTERS/Paul Hackett

LONDON (Reuters) - The investigation into a 250 million pound ($402 million) profit overstatement at supermarket operator Tesco Plc has unearthed evidence of "inappropriate behavior" by staff, two national newspapers reported on Sunday.

Tesco declined several requests for specific comment on the profit overstatement as detailed in the Sunday Times and the Sunday Telegraph on Sunday. The company said the first details about the investigation, which it commissioned after the accounting error was discovered, would be released as planned on Thursday, when it reports its half-year results.

The Sunday Times and The Sunday Telegraph both reported that the investigation by accountants Deloitte [DLTE.UL] and law firm Freshfields had uncovered a pattern of "inappropriate behavior" by staff. The Sunday Telegraph cited a senior source close to the investigation, while the Sunday Times did not cite any sources.

Deloitte declined to comment.

The Sunday Times said the problems, which Reuters was unable to independently verify, were confined to the first half of this year and the retailer will not have to restate previous years' results.

The Sunday Telegraph said the profit overstatement relates to the booking of supplier contributions that were conditional on hitting sales targets that it was not going to reach.

Realizing that these goals would not be achieved, a "small group" of employees struck deals with suppliers to still make these payments by offering benefits in the next financial period. The benefits were kept secret and in the worst-case scenario involved the retailer paying back its suppliers, it added.

The newspaper's source said the practices had been going on for more than a year on a smaller scale, but ramped up in the last six months as pressure mounted on sales.

Tesco has so far suspended eight employees, including UK managing director Chris Bush, in connection with the accounting error.

The retailer, once the darling of the sector during two decades of uninterrupted earnings growth, is expected to report first-half underlying profit of 850 million pounds, half of the 1.6 billion it made in the comparable period last year.

It has suffered over the last year with its big out-of-town stores losing favor as shoppers buy more locally and online, while discounters Aldi [ALDIEI.UL] and Lidl [LIDUK.UL], along with upmarket chains Waitrose and Marks & Spencer, squeeze the middle ground.

(1 US dollar = 0.6214 British pound)

(Reporting by Clare Hutchison; Editing by David Holmes)