Tesco has suspended four executives, including its UK managing director, after the supermarket overstated its half-year profit guidance by £250m.
That would be almost a quarter of its expected profit for the period.
It has launched an investigation headed by Deloitte, and says it is now working to establish the impact of the issue on its full-year results.
"Disappointment would be an understatement," said Tesco chief executive Dave Lewis.
Mr Lewis, who only took the helm on 1 September, said it was "a serious issue", but insisted "it doesn't take away from what I'm able to build at Tesco".
The news prompted a plunge in Tesco's share price, which closed 11.6% lower at 203p.
As a result almost £2.2bn was wiped from Tesco's value on the stock market.
Mr Lewis said "a number of people" had been suspended from duty "to facilitate the fullest and deepest investigation possible", but said this was not "disciplinary or an admission of guilt".
UK managing director Chris Bush is one of those suspended, according to Radio 5 Live presenter Adam Parsons.
Mr Lewis said Robin Terrell, Tesco's multi-channel director, would be "stepping in and running and leading the UK leadership team", but he refused to confirm that Mr Bush had been suspended.
Mr Lewis said the issue was "something completely out of the ordinary" and his priority was to carry out "a full and frank investigation".
"We will take decisive action as the results of the investigation become clear," he added.
Tesco also confirmed that there had been no chief financial officer (CFO) at the group since its current CFO Laurie McIlwee left just over a week ago, following his resignation in April.
Marks and Spencer's CFO, Alan Stewart, was announced as Mr McIlwee's replacement in July, but is not due to join Tesco until December.
Tesco chairman Sir Richard Broadbent rebuffed criticism that he should have discovered the issue sooner.
"Things are always unnoticed until they have been noticed." he said. "The shareholders will have to decide for themselves whether I'm part of the solution or part of the problem."
Analysis, Simon Jack, business correspondent:
Breaking accounting rules to exaggerate profits is a cardinal sin as far as investors are concerned and Tesco has been punished severely with shares falling more than 10% at one stage today.
The scale of the discrepancies which happened in its core UK food retail business poses serious questions on how this important UK company has been run.
In effect this FTSE 100 company has been operating without a CFO - their replacement for Laurie McIlwee is not due to start for several weeks.
Questions must also be asked of the former boss Philip Clarke, the entire board of directors and the company's auditors.
Taken in isolation this incident would be serious, but added to falling sales, profit warnings and a share price at 10-year lows, it suggests this once formidable retailer is in a state of disarray.
The new boss, Dave Lewis, will hope the investigation he has launched will help put this latest disaster behind him as he tries to rebuild the relationship with customers and investors.
On 29 August, Tesco had said it expected its trading profit for the six months to 23 August to be about £1.1bn, lower than management had expected.
In its latest statement, Tesco said the profits overstatement was "principally due to the accelerated recognition of commercial income and delayed accrual of costs".
It also said some of the error - which referred to its expected profits for the six months to 23 August - was due to the timing of the accounting of payments between suppliers and Tesco.
Mr Lewis said this meant "an element of" expected revenue from its suppliers had been "reported in the wrong time period".
"It's about revenue received versus when the activity took place," he added.
Tesco said "an informed employee" had alerted the board to the issue on Friday, and added it had already informed the UK's financial regulator, the Financial Conduct Authority.
As a result of the problem, Tesco has pushed back the release of its interim results to 23 October, from 1 October.
Deloitte will carry out its investigation with Freshfields, the group's external legal advisers.
Tesco's usual auditors are PWC. The accountancy firm declined to comment.
Shares in Tesco reached an 11-year low in August after the firm cut its full-year profit forecast to £2.4bn from £2.8bn.
The supermarket group has been battling falling sales and a decline in its market share as discount chains such as Aldi and Lidl have gained in popularity.
Previous chief executive Philip Clarke stood down in July after his attempts to revive Tesco's fortunes through a £1bn turnaround plan failed.
Analysts widely criticised Tesco following the announcement.
Cantor Fitzgerald said it had already warned last November that it believed Tesco was "demanding/taking money from suppliers trading accounts".
"We believed Tesco had been overstating its UK commercial gross profit by £200m+ per annum, via deducting monies from suppliers' trading accounts or extending payment dates without notice," it added.
Professor Ajay Bhalla of Cass Business School said "things could not be worse for Tesco's management and shareholders".
"The incoming CEO - Mr. Lewis has a momentous task in hand. Re-building the internal culture and market reputation will be his number one priority," he said.
And Shore Capital analyst Clive Black said he was "flabbergasted" by Tesco's announcement.
"Such an announcement is not the stuff of a well operated FTSE-100 organisation. This development may raise, indeed must raise, much more fundamental questions over the chairman's (Richard Broadbent) position and the nature, composition and extent of the board."