SEC Charges Ex-CEO of Rite Aid With Accounting Fraud

In a case involving the largest-ever corporate restatement, the Securities and Exchange Commission leveled charges against not only the former chief financial officer (CFO) but also the former chief executive officer (CEO) and other members of the management of the Rite Aid Corporation. The complaint alleges that Rite Aid overstated its earnings in prior years, leading to a $1.6 billion restatement of net income.

The alleged accounting irregularities include:

  • Inflated deductions for amounts owed to vendors for damaged and outdated products.
  • Failure to record an accrued expense for stock appreciation rights granted to employees.
  • Improper reversals of expense accruals.
  • Improper adjustments to cost of goods sold.
  • Overcharging vendors for undisclosed markdowns at the retail level.
  • Keeping the books open after year-end to record unearned revenues.
  • Improper recording of a litigation settlement.
  • Improperly capitalizing costs for "dead deals."
  • Improper treatment of payments from insurance carriers for prescription orders never picked up by customers.
  • Irregularities related to accounting for inventory shrinkage.

The complaint also charges that the former CEO fabricated Finance Committee minutes for a meeting that never occurred and caused the company to fail to disclose several related-party transactions in which he sought to enrich himself at the expense of the company's shareholders.

The penalties sought by the Commission include disgorgement of annual bonuses and permanent disbarment from serving as an officer or director of a public company.

-Rosemary Schlank

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