Sunday, October 01, 2006

Another retailer fiddles with allowances

Ahold, Kmart, Office Max, Saks, Home Depot, Penn Traffic … I’ve probably missed a few, but that’s the list that comes to mind of retailers who have recently been accused of playing around with vendor allowances in one way or another. Now CSK Auto joins the list.

You may not know CSK if you live in the eastern half of the country, but in the west, the component parts of their name (Checker, Schucks, Kragen) are among the leading names in auto parts – they have almost 1300 stores and sales of about $1.6 billion – a good-sized outfit.

But apparently some of the top managers didn’t feel that profits were quite as good as they could be, and so they “improved” things. Here’s the press release CSK put out Thursday:

CSK Auto Corporation announced today that the Audit Committee of its Board of Directors has substantially completed its previously announced internal investigation (commenced in March 2006), which was conducted with the assistance of independent counsel and a separate accounting firm. The scope of the investigation focused primarily on the Company's accounting for inventory and vendor allowances associated with the Company's merchandising programs, but was not limited in any way by the Audit Committee. The investigation identified accounting errors and irregularities that materially and improperly impacted various inventory accounts, vendor allowances, other accrual accounts and related expense accounts.

Several people, including a couple top execs, got the axe:

The Company announced that Martin Fraser (President and Chief Operating Officer), Don Watson (Chief Administrative Officer and former Chief Financial Officer), as well as several other individuals in the Company's finance organization are no longer employed by the Company.

The restatements are tentatively expected to come to $82 million, most of it being related to inventory, but $12 million from vendor allowances.

As we’ve said previously, we don’t expect this to be the last such case. There simply is too much money available in allowances, and it is too easy for an executive under pressure to meet quarterly expectations to fudge those numbers.

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