Management Accounting

Ace Hardware Hammered by $154 Million Inventory Error

The cause of the error, which has put the company's plans to go public on hold, could take months to find, the hardware company says.
Stephen TaubSeptember 6, 2007

Ace Hardware said it discovered a $154 million accounting discrepancy between its general ledger and its actual inventory¸ which will force it to restate prior results and put its plans to go public on hold. The cause of the error is still unknown.

The retailer-owned cooperative, with 4,600 hardware, home center and building materials stores said the error appears to have accumulated over at least five years.

In August, the company discussed with its retailers the possibility of converting from a cooperative to a traditional, publicly­traded corporation, but the company says it has since put such plans on hold. The accounting error was discovered during an internal review of financial reports. It explained that it had found a difference between the company’s 2006 general ledger balance — the company’s primary method for recording financial transactions — and its actual inventory records, referred to as its perpetual inventory balance.

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Ray Griffith, Ace’s president and chief executive officer, told the Associated Press the error was “an overstatement of gross margin that resulted in an overstatement of gross profits that resulted in an overpayment of patronage dividends.”

In a press release, Griffith asserted that he does not believe there are any other significant problems in the company’s financial statements or reporting. He also said there is absolutely no indication of “theft or missing inventory.” Ace said the final amount could be less than the $154 million, but still will be likely to result in a restatement of the company’s financial results.

Upon discovering the issue, Ace said it immediately hired Protiviti Inc., a consulting firm with expertise in inventory reconciliation matters, to help identify the exact cause, extent of and solution to this problem. “The company and Protiviti are working diligently and urgently to tackle the issue,” it added in a press release. “However, given the complexity of the situation and Ace’s desire to be as thorough as possible, a full assessment of the error could take several months to complete.”

“Obviously we’re upset, but we feel very confident that it’s a manageable situation and that our business is sound,” Griffith added in the interview with the AP. “We’re still a very viable business, our comp sales are doing well. This is an accounting issue.”

“The board of directors is actively engaged and intensely focused on this issue,” said J. Thomas Glenn, chairman of Ace’s Board of Directors, in a statement. “We take this matter very seriously and will see that it is resolved.”