Accounting & Tax

Report Details Bad Bookkeeping at Rent-Way

An internal report by two law firms says expenses were artificially cut by $127 million.
CFO.com StaffJune 8, 2001

The Wall Street Journal reports today that according to people close to the company, an internal investigation by two law firms has determined that Rent-Way Inc.’s financials were off by far more than previously announced.

The law firms, retained separately by the rent-to-own company and its audit committee, found that improper bookkeeping entries total about $127 million for the past two fiscal years alone; the company still is examining results for fiscal 1998, said the Journal. The company reported net income of $14.6 million, or 68 cents a diluted share, on revenue of $494.4 million for the fiscal year ended Sept. 30, 1999; those results will be restated, while the company expects to file its fiscal 2000 financial results this month.

Back in October 2000, Rent-Way announced accounting improprieties, estimating expenses were artificially reduced by $25 million. The company fired controller and chief accounting officer Matthew Marini, COO Jeffrey Conway, who was Marini’s boss, and the company’s assistant controller. In December, Rent-way raised the artificial-expense- reduction estimate to the $55 million to $65 million range.

Drive Business Strategy and Growth

Drive Business Strategy and Growth

Learn how NetSuite Financial Management allows you to quickly and easily model what-if scenarios and generate reports.

The newspaper says that a report prepared by the two law firms, which will be turned over to the Securities and Exchange Commission, addresses how such a big problem could go undetected for so long. In large part, it was because there wasn’t one big item that accounted for the improprieties but nearly a dozen smaller instances of hiding or understating expenses, from automobile maintenance to insurance payments, according to people who have read the 50-page internal report.

The artificial entries detailed in the report were as low as $200,000 (and, in the end, as high as $3.2 million), small enough for senior executives to miss, wrote Menachem Z. Rosensaft, an attorney for the audit committee of Rent-Way’s board, in a prepared statement. The improprieties also involved overstating the value of inventories, according to the people who have read the report.

The improprieties began surfacing when Marini went on vacation, says the Journal, and Rent-Way’s new CFO William McDonnell became suspicious about seemingly high inventory levels. As officials pressed for an explanation, the internal report states, employees began coming forward with reports of altered financial entries they claim were made under Marini’s direction, according to people who have read the report. The law firms — Hodgson Russ LLP, of Buffalo, N.Y., and Ross & Hardies, of Chicago — found no evidence that CEO William Morgenstern had any knowledge of the improprieties. The report also concludes that Conway was either aware or should have been aware of certain of the accounting matters, but the investigators found no evidence linking him to the improprieties, these people said.

Morgenstern told the Journal he missed the improprieties, in part, because he was often on the road making acquisitions for Rent- Way.

The report doesn’t delve into potential motives, people who read the report told the Journal. But, the actions came at a time when the company was rapidly expanding. In fiscal 1999, Rent-Way was saddled with as much as $35 million in costs stemming from an acquisition spree, including shabby stores and shoddy rental merchandise. In fiscal 2000, an aggressive expansion strategy to open 100 stores resulted in cost overruns.

According to the report, the problems deepened in late 1999, when Marini artificially reduced a wide range of costs. Among other things, he allegedly began recording some big expenses, such as vehicle maintenance, as assets, whose value could be written down over time rather than immediately. Several weeks before the close of that fiscal year, Rent-Way’s accounting department simply stopped booking accounts payable. Marini also kept such items as scrapped furniture on the balance sheet as assets rather than writing off their value. In June 2000, he limited the amount of missing and discarded rental merchandise that should be written off by divisional vice presidents; several months later, with the fiscal year soon to end, he instructed those managers to delay writing off missing merchandise entirely until the new fiscal year, the people said. For fiscal 1999, Marini was able to artificially reduce expenses by about $28.3 million, people close to the company told the paper, allowing the company to post $30.3 million in operating income before taxes, rather than about $2.3 million. The fiscal 2000 tally for the artificial reduction of expenses: $99 million, these people said.

The saga began last October when CFO McDonnell, who had been named CFO in February, discovered that Rent-Way’s in-store inventory system indicated less merchandise in the stores than on the corporate books, people who have read the report told the Journal.

With Marini on vacation, McDonnell, who lacked an accounting background, pressed COO Conway for an explanation, the people close to the company told the Journal. The conversation unsettled McDonnell and prompted him to drive an hour to visit his attorney in Cleveland, these people said.

When Marini returned from vacation that week, Morgenstern met with him and McDonnell and Conway. At the meeting, Marini and Conway maintained that a number of rental stores were installing in-store inventory systems and their merchandise hadn’t been recorded, the people close to the company told the Journal.

After some more digging by Morgenstern and McDonnell, employees came forward, including the assistant controller, who detailed unsupported entries she claimed were made under Marini’s orders, says the Journal.

By that weekend, Morgenstern had fired Marini and Conway, shutting them out of the company’s computer system and changed the building’s locks, the people close to the company told the newspaper. On October 30, Morgenstern and his attorney publicly disclosed the matter after asking the NYSE to delay the opening of trading in Rent-Way shares.

A Rent-Way spokesman said the company is cooperating with the SEC, which is investigating. The Federal Bureau of Investigation is looking into the matter, according to the company.

4 Powerful Communication Strategies for Your Next Board Meeting