A mid-level employee in the finance department at Ace Hardware caused a $152 million accounting discrepancy between general ledger and actual inventory, the Chicago Sun-Times reported.
As a result, the cooperatively owned retailer must restate its earnings for fiscal years 2004 through 2006, according to the report, citing CEO Ray Griffith. It will also correct its numbers for fiscal 2007.
Griffith told the paper that the person who made the error worked at Ace for eight years but is no longer employed there.
The $152 million discrepancy was discovered in September during an internal review of financial reports. Ace explained that it had found a difference between the company’s 2006 general-ledger balance — which is its primary method for recording financial transactions — and its actual inventory records, referred to as its perpetual inventory balance.
The former finance worker made journal entries of a “sizeable amount” that masked a difference in numbers between the two ledger books, the Sun-Times reported, adding that the ledgers looked as though they were reconciled, but were not. “Numbers were flowing through one of the ledgers but not flowing into the other,” Griffith told the paper.
About one-quarter of the error dated to 1995, and the rest took place from 2002 through 2006.
In his interview with the Sun-Times, Griffith stressed that the employee did not commit fraud and that no inventory or money is missing. He conceded that the person was not properly trained or equipped to do the job, and admitted that the situation was Ace’s fault. “We are embarrassed by it,” he reportedly said. “We did not provide the training, oversight or checks and balances to help that person do [his or her] job.”
Griffith blamed the error partly on the increasingly complex and competitive retail hardware industry. Specifically, systems in place were not adequate for addressing complications that arose from Ace’s recent increase in product imports from Asia, he said.
The errors were uncovered after Ace hired law firm Skadden, Arps, Slate, Meagher & Flom to investigate and hired consulting firm Protiviti to lead the reconciliation of the books, the Sun-Times noted. The investigation cost about $10 million, according to the report.
Ace’s vice president of finance, Ron Knutson, resigned in early December, and other employees have been reassigned, according to the paper; the company plans to hire a chief financial officer and recently began to implement checks and balances. It also plans to start using computer systems and expand its internal audit department.
In August, before the accounting error was discovered, the company discussed with its retailers the possibility of converting from a cooperative to a traditional, publicly traded corporation, citing competition from Home Depot, which is testing small stores for possible rollout; Orchard Supply, a 90-store chain of hardware stores in California that has a private equity group as an investor that holds an option to take a controlling interest; and Wal-Mart.