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Fourth-quarter earnings nosedive, the CFO departs, and the SEC is investigating the company for fraud three months after a restatement over vendor-program accounting.
Alan Rappeport, CFO.com | US
February 26, 2008
In separate communications on Tuesday, Office Depot first announced that CFO Patricia McKay will leave the company on March 1, and then filed its 2007 annual report in which it revealed that the Securities and Exchange Commission is conducting a formal securities-fraud investigation of the company.
The SEC has been reviewing the company's contacts and communications with financial analysts since July, and upgraded the inquiry to formal status in January, the annual report stated. However, the company said it believes the investigation will not have a material effect on its finances or operations.
News of McKay's departure came as Office Depot announced disappointing quarterly results showing falling profits and rising expenses. Fourth-quarter earnings fell from $126.6 million last year to $18.8 million.
Three months ago, Office Depot was forced to revise some of its financial statements due to problems with its vendor-program accounting. A whistle-blower complaint sparked an independent review that found that from the third quarter of 2006 until the second quarter of 2007, the company recognized funds due or received that should have been deferred to later periods.
Areas under now investigation by the SEC include inventory receipt, timing of vendor payments, timing of recognition of vendor-program funds, and inter-company loans, Office Depot said in its annual report.
Charles Brown, who served as CFO from 2001 until 2005 and is currently president of company's international division, will fill the top finance post until a replacement is named.
"Pat has made valuable contributions to the company since joining the management team in 2005," said Steve Odland, Office Depot's chief executive officer. "We thank her for her tireless work and dedication."
McKay became CFO of Office Depot in 2005. Previously she had been executive vice president and CFO of Restoration Hardware, senior vice president of finance at AutoNation, and vice president and controller at Dole Food Company.
Office Depot, the second-largest office supplier in the United States, has been hit especially hard by the slowing economy and the impact of the weak housing market in Florida and California. "This economic weakness has spread to other U.S. retail markets with housing issues, creating additional pressure on sales and margins," the company said.
At that time of its restatement last November, Office Depot said it had identified a material weakness in its internal controls and that it was firing four employees in its merchandising organization. It had to reduce its fiscal 2007 earnings by 2 cents per share for the second quarter and by a penny for the first quarter. For 2006 it reduced third-quarter earnings by 2 cents and fourth-quarter earnings by 3 cents.
Material weakness disclosures have been a sore spot for corporations lately, and recent academic research has found that CFOs tend to be penalized for such errors.