Image copyright Getty Images

The Serious Fraud Office (SFO) is carrying out a criminal investigation into accounting irregularities at supermarket giant Tesco.

Tesco says it has been "co-operating fully" with the SFO.

Last week, the supermarket announced that its profits had been overstated by £263m, up from an initial estimate, made last month, of £250m.

The inflated profit figure was the result of Tesco bringing forward rebates from suppliers.

The SFO confirmed the probe, but declined to give further details.

The new probe means an investigation by the Financial Conduct Authority (FCA) will be ended, Tesco said.

'More serious'

The FCA will be turning over its evidence to the SFO investigators.

Analysis: Simon Gompertz, business correspondent, BBC News

Although there had been speculation about the Serious Fraud Office taking an interest in Tesco's problems, the fact that it has announced an investigation is a major blow for the company.

It takes the matter out of the hands of the Financial Conduct Authority, the City regulator, and into the sphere of the body which probes the gravest of financial crimes.

Those found guilty of some forms of fraud can be sentenced to up to 10 years in prison and companies can face unlimited fines.

All we know at this stage is that the SFO will scrutinise Tesco's accounting practices, the practices which resulted in profits being overstated by £263m after the company appeared to book income from suppliers too early.

This is not something which is likely to have had much of an impact on customers and what they paid for their groceries. But for investors and lenders, the reliability of financial statements is crucial.

The SFO's investigations can take years to complete. We are unlikely to hear the outcome soon and they may find nothing amiss.

However, we now know that our foremost retailer is being investigated by the organisation which deals with the most serious frauds which come to light in the UK.

"The management at Tesco will have been aware of the close working relationship between the FCA and the SFO, and the potential for the matter to move to this more serious criminal phase," said Robert Amaee, partner law firm Covington & Burling and former head of anti-corruption and head of proceeds of crime at the SFO.

"The SFO will no doubt be engaging with the new management to review the scope and focus of Tesco's ongoing internal investigation, and the steps taken for example in relation to the preservation of documentary evidence, and the interviewing of witnesses, some of whom have already been suspended by the company," he said.

Tesco had been doing deals with suppliers over promotions, which is commonplace for supermarkets.

But it appears Tesco had been booking returns from those promotions too early, while pushing back the costs.

The UK accountancy regulator, the Financial Reporting Council, is also monitoring Tesco.

"Now that Tesco are being investigated for fraud by the SFO, the Financial Reporting Council have yet greater reason to start an investigation into the auditors' role with regard to these irregularities," said Warwick Business School's Prof Crawford Spence.

Tesco auditor PwC declined to comment.

Overstated

The accountancy firm Deloitte last week completed its investigation into Tesco's misreported profits.

It found that they were overstated by £118m in the first half of this year, by £70m in the 2013-2014 financial year and by £75m before that.

Tesco rose 2.74% to 174.45 pence in London trading, while the FTSE 100 advanced 0.9%.

The supermarket giant's shares have lost more than half their value in the last 12 months, tumbling from 369.10 pence.

While eight executives have been suspended since that practice was revealed, Tesco has said there was no evidence of personal gain from the mis-statement.