Rite Aid overdosed on accounting palliatives, experts say
NEW YORK, July 12 (Reuters) - Questionable accounting methods employed by embattled Rite Aid Corp. to overstate its earnings by more than $1 billion are popular with some other companies, though in much smaller doses than used by the No. 3 U.S. drug store chain, accounting experts said.
"I think many of the techniques employed by Rite Aid are employed by other companies, but to a much lesser extent," said Paul R. Brown, chairman of the accounting department at New York University's Stern School of Business. "Their numbers were nowhere near what they reported."
On Tuesday, in its first financial statement since late 1999, the Camp Hill, Pa.-based retailer announced a $1.1 billion loss for the fiscal year that ended last February and said it had overestimated results for two earlier years by a total $1.06 billion. In aggregate, its retained earnings had been cut by $1.6 billion, the company said.
Brown, who has been following the retailer's accounting woes, which have become the subject of federal investigations, said Rite Aid employed a couple of dozen methods to massage its results.
"People usually don't play them all at the same time," said Eric Bosshard, an analyst at Midwest Research in reference to the techniques used by Rite Aid. "That's what made this situation unique."
Some of the accounting methods fell into "gray areas" about whether a cost should be recorded, but some items, such as capitalizing repairs and some interest expenses, do not follow generally accepted accounting principles, Brown said.
Repair costs and interest should be recorded as costs that go on an income statement and affect profits. By capitalizing those costs, Rite Aid was able to inflate profits.
Rite Aid's finances have been the subject of investigations by the Securities and Exchange Commission and the U.S. Attorney's Office since last year. The company did not report its results for the year ended February 2000 until Wednesday because of its accounting problems.
Rite Aid attributed the majority of the revision of its figures to inventory adjustments and "former management's overly aggressive expansion program for the last three years," Chairman and Chief Executive Bob Miller said in a statement.
Sarah Datz, manager of public relations at Rite Aid, said the company was cooperating fully with federal probes and the retailer turned over materials from its $50 million internal investigation to authorities.
Rite Aid, which reported more than $14 billion in sales for the year ended February 2000, acquired PCS Health Systems Inc. and six separate drug store chains with 1,409 stores. The company also opened 376 new stores, relocated 727 and closed 818.
Two accounting giants Arthur Andersen and Deloitte & Touche spent the last seven months helping a new Rite Aid management team to unravel the company's accounts.
KPMG, the former auditors of Rite Aid, resigned in November after the firm said it could no longer rely upon Rite Aid management's representations of the retailer's finances. The company replaced most of its top management last year.
"For KPMG, this is clearly embarrassing," Bosshard said. "But as an outside auditor, you can only deal with the information you're provided. I don't think KPMG was complicit or involved in it. They got horrible information."
Brown said the delay in KPMG's ability to uncover the accounting troubles was "perplexing."
"The magnitude of the restatements are at least on the scale of Cendant," Brown said.
KPMG could not be reached for comment, while Deloitte & Touche declined comment.
Cendant Corp. <CD.N>, a company best known for its real estate brokerage franchising operations, was formed by the 1997 merger of CUC International and HFS Inc. The company endured an accounting scandal in 1998 at CUC that slashed billions off its market value and led to three former CUC executives pleading guilty to fraud in June.
When auditors review a firm's financial statements, they are only really charged with making sure the results are materially accurate and give a fair representation of the state of the company's business, Brown said.
"If management overtly and purposely tries to mislead the auditor, it is doubly hard for the auditor to do the job," he said.
19:51 07-12-00
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