Accounting & Tax

No More “Allowances” for Kmart, Vendors

Securities and Exchange Commission settles with the final two defendants in a long-running case involving revenue recognition.
Stephen TaubMarch 2, 2007

The Securities and Exchange Commission has announced it settled charges against the final two defendants who allegedly caused Kmart to issue materially false financial statements by improperly accounting for millions of dollars worth of vendor “allowances.”

In December 2004, the SEC filed civil charges in U.S. District Court for the Eastern District of Michigan against five current and former employees of Eastman Kodak, Coca Cola Enterprises, and PepsiCo subsidiaries Pepsi-Cola and Frito-Lay, as well as three former Kmart executives.

The SEC alleged at the time that the individuals helped Kmart prematurely recognize the allowances — which the retailer obtained from its vendors for promotional and marketing activities — by providing false information to Kmart’s accounting department.

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The SEC asserted that a number of vendor representatives co-signed false and misleading accounting documents, executed side agreements, and, in some instances, provided false or misleading third-party confirmations to Kmart’s independent auditor, PricewaterhouseCoopers.

As a result, Kmart overstated net income for the fourth quarter and fiscal year ended January 31, 2001, by about $24 million, or 10 percent of the total reported at the time. Kmart later restated its results after filing for bankruptcy.

Since that time, the SEC announced settlements with two Kmart executives and three vendor defendants. Last March, the court granted a motion by a sixth defendant to dismiss the charges against him in their entirety. The two remaining defendants were John Paul Orr, former divisional vice president of Kmart’s photo division, and David C. Kirkpatrick, former national sales director for Coca Cola Enterprises.

On Friday the SEC announced that, without admitting or denying the charges against him, Orr agreed to settle by consenting to a cease-and-desist order. Kirkpatrick also consented to a cease-and-desist order, without admitting or denying the charges, and agreed to pay a $25,000 civil penalty.