Letter Says Kmart Mislead Shareholders

Kmart Corp. (KM) employees were directed to post transactions in "obvious violation" of generally accepted accounting standards, according to an anonymous letter that has launched a federal investigation of the company.

"We are now closing our books for the full fiscal year making even more improper entries," said the Jan. 9 letter obtained by The Detroit News. "We have been clearly told that questioning any accounting practices will be viewed as unacceptable team behavior."

Officials at the Troy-based retailer declined to comment Friday on the letter. Kmart said earlier this year that it received a letter claiming to be from employees just days before its Jan. 22 Chapter 11 bankruptcy filing.

The discount retailer launched an investigation of its accounting practices and has since changed the way it records vendor discounts. As a result, Kmart restated earnings for the first three quarters of 2001, increasing its reported losses by $501 million, for a total of $635 million during that period. The company also revised its 2002 monthly operating statements.

Kmart also is investigating what the company called the "stewardship" of Kmart by members of its former management team under Charles Conaway. The company hasn't disclosed the problems being reviewed.

The FBI also is investigating possible criminal charges.

The two-page letter alleges that senior Kmart officials purposely violated standard accounting principles. It also charges that independent auditors from PricewaterhouseCoopers LLC knew about the irregularities but didn't question them.

"Resident auditors from PricewaterhouseCoopers are hesitant to pursue these issues or even question obvious changes in revenue and expense patterns," the letter states.

David Nestor, a spokesman for PricewaterhouseCoopers in New York, said the company could not comment on the letter's contents.

The charges are being made in the wake of the collapse of Enron Corp. amid questionable accounting transactions by its auditor, Arthur Andersen LLP. There has been heightened sensitivity about accounting issues in the wake of the energy trader's collapse.

Kmart, which has struggled to compete with Wal-Mart and Target Corp., filed for bankruptcy Jan. 22 after disappointing holiday sales and a stock dive.

Shares of Kmart fell 5 cents to close Friday at $1.11 on the New York Stock Exchange.