Financial Accounting Blog

Tuesday, November 11, 2003

Prosecutors Drop Kmart Fraud Case - Accounting-

This is a good article that demonstrates the revenue recognition principle and how it can be manipulated to underestimate losses. Fortunately for Kmart the charges were dropped.

According to the indictment, Montini and Hofmeister negotiated a multiyear contract with one of Kmart's vendors — American Greetings Corp. — for $42.3 million. The two individuals lied to Kmart accounting personnel and concealed a side letter that called for the repayment of the money under certain circumstances, the indictment notes.

As a result of the scheme, Kmart improperly recognized the entire amount in the quarter ended August 1, 2001, instead of over a period of time, according to the SEC's complaint. The alleged deceptions also caused Kmart to understate losses.