New Evidence Relates to Kmart's Accounting Irregularities

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Discount retailer Kmart is undergoing an internal investigation into irregular accounting practices in light of the company's restatement of 2001 and 2002 earnings and its Chapter 11 bankruptcy filing. The Securities and Exchange Commission (SEC) is investigating Kmart, as is the U.S. Attorney's Office for the Eastern District of Michigan, and the FBI is also investigating Kmart on possible criminal charges. The company filed for bankruptcy on January 22, 2002.

In January an anonymous letter initiated an internal probe of the company's accounting practices. The contents of the letter were not made public at that time. Now, the Detroit News has obtained a copy of the letter that states that, "On several occasions [Kmart employees] have been directed to post and summarize transactions in obvious violation of [generally accepted accounting] standards." The letter, dated January 9, 2002, purports to be written by members of Kmart's finance division.

The letter goes on, "We are now closing our books for the full fiscal year making even more improper entries. We have been clearly told that questioning any accounting practices will be viewed as unacceptable team behavior." Allegations in the letter point to senior Kmart officials as purposely violating accounting principles with the knowledge of the company's auditors, PricewaterhouseCoopers.

The U.S. Attorney's office reports that more than one anonymous letter has been received.

Last week the company reported a $1.02 billion loss for the month of April. Earlier this month Kmart announced it was filing for an extension of time to file its Annual Report with the SEC so that the company's new management team could have enough time to complete its review of Kmart's accounting policies and procedures.


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