Management Accounting

Office Depot to Restate over Vendor Allowances

The office-supply retailer found a material weakness in its internal controls.
Alan RappeportNovember 9, 2007

Office Depot said Thursday that it will revise some of its financial statements after a whistle-blower complaint sparked an independent review of its vendor-program accounting.

The review 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. Office Depot will reduce its earnings for the 2007 fiscal year by 2 cents per share for the second quarter and by a penny for the first quarter. For 2006 it will reduce third-quarter earnings by 2 cents and fourth-quarter earnings by 3 cents.

“As a result of the investigation, the company has identified this to be a material weakness in its internal controls and is taking actions to remediate the deficiencies identified,” Office Depot said in a statement. One immediate step will be to fire four employees in its merchandising organization.

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The company said it will recognize related amounts of 7 cents per share beginning in the second half of 2007 and decreasing until 2010. It expects to complete its filings, which were delayed, by the end of November.

Vendor allowances have been a continuing sore spot for corporations in the past few years. Most recently, in early September Saks Inc. settled Securities and Exchange Commission charges that from the mid-1990s until 2003, it intentionally understated to vendors the sales performance of their merchandise and collected millions of dollars in allowances to which it was not entitled.

As a result, the company overstated earnings from 1999 through 2002. The SEC asserted that the improper accounting resulted from Saks’s aggressive financial targets for the division, the belief by some Saks buyers that they were expected to achieve their targets by deceptive means if they needed to, and the company’s lack of adequate internal controls.

Under its vendor-allowance method, Saks and its vendors shared the risk that goods wouldn’t sell at full price. That helped Saks hit minimum profit margins, according to the complaint. “The more Saks had to mark down the vendor’s merchandise in order for it to sell, the more the vendor was expected to compensate Saks in additional vendor allowance,” the commission said.

The Delray Beach–based Office Depot has annual sales of more than $15.4 billion and is the second-largest office supplier in the United States.