In a surprise announcement that was both shocking and familiar, Ace Hardware revealed on Sept. 5 that it discovered a $154 million “accounting error” in the company’s financial statements. The Oak Brook, Ill., co-op is now in the process of reviewing several years of financial records to determine the cause of the discrepancy, how far back it goes and exactly how much money is involved.
Ace is being assisted in the effort by Protiviti, a forensic accounting firm. The process could take several months to complete.
In an interview with HCN, Ace president and CEO Ray Griffith stressed that there was no evidence of theft or missing inventory. The error came to light, he said, when Ace was assembling its proposal to become a for-profit corporation. Financial reporting requirements by the Securities and Exchange Commission (SEC) caused Ace to closely examine its past revenue streams and other historical financial records.
Griffith said he first learned of the accounting discrepancy at about 5 p.m. on Aug. 16, when Ron Knutson, Ace’s vp-finance, and Art McGivern, senior vp-general counsel and secretary, came into his office. Griffith informed Ace’s board of directors the next day, and coop employees worked throughout the weekend trying to find the mistake. But they could not reconcile a $154 million difference between the company’s general ledger balance (record of financial transactions) and its “perpetual inventory” (actual inventory records) for 2006.
The shortfall seems to have accumulated over a period of at least five years.
As a result of the accounting error, Ace understated the cost of goods sold and overstated the company’s gross profit and net income for the years 2002 to 2006, and possibly before that.
“We have reason to believe that a portion of that [shortfall] is in the import area,” Griffith said, singling out “freight and duties [more] than actual inventory.” Because the percentage of imported merchandise has ramped up in recent years —Ace brought in $325 million worth of direct imports in 2006 —the losses may be more concentrated in the past couple of years, he acknowledged.
One week after he learned of the accounting error, Griffith stood in front of 250 Ace group leaders in Schaumburg, Ill., and pitched the idea of changing the organization over from a co-op to a for-profit corporation. That proposal has since been shelved.