The Securities and Exchange Commission has started a formal investigation into accounting irregularities at the third-largest office supplies retailer.
OfficeMax Inc., headquartered in Itasca, Ill., had conducted its own investigation after a supplier alleged that OfficeMax employees acted “inappropriately” in requesting payments. Six employees were fired earlier this year.
The company revealed that employees had falsified $3.3 million worth of rebates allegedly owed to OfficeMax by suppliers, The Chicago Sun-Times reported. Vendors sometimes offer payments to retailers for extra displays or favorable placement in the store to promote their products.
The SEC probe focuses on that issue, said OfficeMax spokesman Bill Bonner. “Some of the employees were requesting, improperly, funds for promotional activity,” Bonner said. The company is cooperating with the SEC investigation.
"The SEC typically will proceed with a formal investigation if they believe the evidence points toward potentially fraudulent accounting," said Richard Hastings, senior retail analyst with Bernard Sands LLC. "And the lines between errors and mistaken entries and fraud are very blurry lines," he told the Chicago Tribune.
OfficeMax said operating income was overstated by $4.3 million in the first three fiscal quarters of 2004. In the fourth quarter, its profits plummeted 90 percent. On May 3, OfficeMax revised first-quarter 2005 results from a profit to a loss of $5.3 million because the company set aside $9.8 million in a legal reserve fund.
The company has gone through three CEOs just this year. It has also switched to traditional contracts with a “substantial portion” of its vendors so no payments are made for promotions.
Anthony Chukumba, an analyst at Morningstar, told the Sun-Times that the SEC could levy a penalty that "may be more than a slap on the wrist, but nothing that's going to materially affect their financial position." He added, "The company uncovered this issue and has sort of cleaned house.”