Home Cooked Books

August 11th, 2005
By Suzanne Kapner
NY Post

A Home Depot case of overcharging suppliers to cover the cost of damaged merchandise went beyond a single store and was common practice at other locations throughout the company, say four current and former employees.

The employees, all but one of whom agreed to speak on the condition of anonymity for fear of retribution, outlined a plan, one called it, "washing the numbers," that they said allowed stores to artificially boost profits.

Store clerks, these people said, were pressured to overcharge suppliers for faulty goods, sometimes by inputting false product codes into the computer system, or incorrectly classifying the merchandise in other ways.

As a result, stores were able to collect money from suppliers that could be used to offset inventory shortfalls from theft or other mistakes and boost profits, said these people, each of whom worked in different areas of the company, spanning four states, including the corporate office in Atlanta.

"Our return to vendor practices are subject to individual vendor contracts and we maintain a zero tolerance policy for any deviation from our obligations," Home Depot said in a statement.

A senior Home Depot official acknowledged that management has been aware of the problem for at least 19 months, when a memo, dated Feb. 12, 2004, was circulated by the corporate office that outlined procedures for collecting chargebacks from suppliers. The memo was published to quell the concerns of several employees who had complained that superiors were pressuring them to participate in the scheme, this person said.

Management has since begun rolling out a new computer system that includes financial controls to safeguard against fraud, this person continued.

Potential problems related to Home Depot's accounting for chargebacks came to light last week after a former employee filed a complaint against the company, the allegations of which were published in The Post.

"It raises some red flags regarding the company's internal controls," said Nancy McClure, an accounting professor at Penn State University, who said she has no first-hand knowledge of the purported improprieties.

As described by one employee, who said he has first-hand financial knowledge of a dozen stores, inflated vendor chargebacks can account for less than 1 percent of a store's annual sales.

But given the thin margins in retailing, that amount is often enough to mean the difference between a store making or missing its numbers, he said.

This person said the practice of inflating vendor chargebacks intensified after a change to employee compensation in 2001 that increased the amount of stock employees received as part of their bonus -- giving them an incentive to boost the stock price.

One way to make the stock go up is to use the extra money collected from suppliers to inflate store profits, this person said.

Another former employee suggested that the practice has been going on for far longer, perhaps more than a decade.

Jonathan Faitsch said he was instructed to doctor the amount of money collected from vendors at two Connecticut stores, where he worked from 1993 to 1995.

Faitsch said that he was required to log a fixed amount of supplier credits each week, regardless of whether there was damaged merchandise to back up those claims.

"You were expected to make up a few here and a few there, so it didn't look like a thousand of the same product," Faitsch said.