Ace Hardware CEO Ray Griffith said the company’s $152 million accounting error is embarrassing, but the completed investigations released to members last week show no missing money, no missing inventory and no fraud. In an interview with HCN, he added that Ace now enters “phase two” of its recovery process.
The investigations from Protiviti, an independent risk consulting company, and legal firm Skadden, Arps, Slate, Meagher & Flom indicate a mid-level employee made the initial accounting mistake, and the co-op’s systems and management team failed to catch the error. The investigations concluded the size of the error was $152 million.
Griffith called the conclusion of the investigations a “significant milestone” that represents progress.
“It is always a relief for any president, CEO, board of directors and stock holders to know that no one took any money, no one stole any inventory and there was no fraud committed by anyone,” Griffith told HCN. “Those are not my words, those are Skaddens, as a result of the investigation.”
While maintaining a positive outlook on the investigations, Griffith pointed to a handful of dealer defections that came at least in part because of the accounting error. Through its district managers in the field, Ace is aware of four retailers that have left the co-op, Griffith said. The company has identified a list of about 50 retailers “upset over the accounting issue” to the point where leaving is a possibility, he said.
With the investigations complete, Griffith told HCN the co-op can now move forward into “phase two” of a three-part recovery plan. Phase two will include training and recruitment of talent. “Phase three” will focus on information technology system changes and the expansion of internal audit functions.
As previously reported, the co-op will turn to members to restore its equity to the $320 million level. The co-op set up variance allocation accounts that will be based on each store’s proportionate share of warehouse dividend pool purchases from 2002 through 2006.
Asked about the tone of various postings on Internet bulletin boards from critical dealers, Griffith pointed to day-to-day feedback from retailers supportive of management.
“I’m not so naive to think we still don’t have challenges,” he said. “We do.”
He said management is anxiously awaiting the restatement of financials from KPMG for the years 2004, 2005 and 2006. He anticipates that report to be completed by the end of February. Year 2007 financial report should come out on or before the end of April, he said.