Risk & Compliance

SEC May Charge PepsiCo

Kmart allegedly used documents signed by two PepsiCo employees to improperly record the timing of revenue.
Stephen TaubMay 4, 2004

PepsiCo Inc. announced that the Securities and Exchange Commission may bring civil charges against its Pepsi-Cola and Frito-Lay divisions stemming from a probe into possible revenue-recognition abuses at Kmart Corp.

According to PepsiCo, the SEC alleges that in early 2001, a non-executive employee at Pepsi-Cola and another at Frito-Lay signed documents prepared by Kmart acknowledging payments of about $3 million from Pepsi-Cola and $2.8 million from Frito-Lay. Kmart allegedly used these documents to improperly record the timing of revenue from the two divisions, it added.

The company announced that it is cooperating fully with the investigation, and that its own internal review determined that no officers of PepsiCo or the two divisions are involved.

“The matter does not involve any allegations regarding PepsiCo’s own accounting for its transactions with Kmart or PepsiCo’s financial statements,” added the company.

Two years ago CFO.com reported that Kmart, in bankruptcy at the time, would probably restate its results due to accounting reasons related to vendor allowances and rebates, as well as general liability reserves.

In a statement, Kmart announced: “The improperly recorded vendor allowance transactions at Kmart which relate to the SEC’s notification to PepsiCo were previously identified as part of the investigation and stewardship review that Kmart completed in early 2003 prior to emergence from bankruptcy. As part of that investigation, Kmart cooperated actively with the SEC and the U.S. Department of Justice, including the disclosure to these agencies of information regarding the improperly recorded vendor allowances.”

The retailing giant added that in response to the findings of the investigation, Kmart fired all employees it deemed to be responsible for the improper recording of vendor allowances.

Kmart also restated financial reports for fiscal 2001 and prior years to correct the improperly recorded allowances.