Kmart Launches Accounting Investigation

Kmart Corp., which filed for bankruptcy earlier this week, said on Friday it launched an internal investigation of its accounting as a result of an anonymous letter sent to its directors, auditors and government regulators.

The disclosure comes amid heightened sensitivity in the wake of the collapse of the energy trader Enron Corp. amid questionable accounting practices. 

Kmart said the letter, which purports to be from Kmart employees, was addressed to the SEC, Kmart's auditors, PricewaterhouseCoopers, and the company's board of directors. 

``The letter has been referred to the audit committee of the board of directors, which promptly engaged outside counsel and accounting consultants to conduct an independent investigation,'' the company said in a news release. 

After receiving the letter, Kmart said it contacted the SEC and notified it about its own investigation. Kmart said the SEC has authorized a private investigation, and Kmart plans to fully cooperate with it. 

The SEC said it would request documents from Troy, Michigan-based Kmart, and a Kmart spokesman said the retailer plans to cooperate fully. 

``The responsible action by any company is to conduct an investigation and let people know that we're cooperating fully with the SEC investigation,'' said Jack Ferry, a Kmart spokesman. 

Ferry would not provide details of the letter but characterized its contents as ``very vague.'' The retailer's statement did not indicate when the letter was received. 

SEC would not comment on the matter. 

ANALYSTS, ACADEMICS SAY MORE INFORMATION NEEDED 

``It's quite possible that some disgruntled employee is trying to get back at Kmart, and one way to do that, especially in the current atmosphere, is to accuse them of improper accounting,'' said Itzhak Sharav, an accounting professor at Columbia University in New York. 

``We need to know who these people are (those that sent the letter) and whether they were in a position to know about its accounting practices,'' Sharav said. 

David Hawkins, a professor at Harvard Business School and an accounting analyst with Merrill Lynch, said areas where questions may rise in the retail industry include miscounting inventory and inflating profit margins. 

``Enron has made people very conscious of accounting problems,'' Hawkins said. ``I think there's going to be a trend toward whistle blowing in the accounting area.'' 

One Wall Street analyst said Kmart's statement contained few specifics, so drawing conclusions would be hard. 

``The statement was rather opaque, and in light of what's going on at Enron, I'm sure people are envisioning the worst,'' said Marie Driscoll, a retail analyst at Argus Research. ``Who knows what is going on, but I certainly don't think Kmart is Enron.'' 

Kmart's board of directors hired law firm Skadden, Arps, Slate Meagher & Flom and accountants Deloitte & Touche LLP to conduct an independent investigation. PricewaterhouseCoopers LLP is Kmart's auditor, but an official of the accounting firm declined to comment on the investigation. 

Kmart filed for Chapter 11 bankruptcy protection on Tuesday after its sales over the crucial Christmas holiday shopping season were disappointing compared with those of competitors. 

Enron as late as last summer was ranked the seventh-largest corporation in the United States, but its stock price collapsed and employee pension investments evaporated after reports that it used accounting gimmicks to hide debt linked to complex partnerships. Enron is now the subject of numerous government investigations. 

Shares of Kmart closed off 8 cents, or 8.6 percent, at 85 cents Friday on the New York Stock Exchange.

Reuters and the Associated Press contributed to this report.