Posted on: Friday, May 17, 2002

FBI checking Kmart accounting practices

By David Enders
Associated Press

DETROIT — Discount retailer Kmart Corp. is being investigated by the FBI for possible criminal wrongdoing.

Kmart spokesman Jack Ferry said yesterday that the company, which entered Chapter 11 bankruptcy protection Jan. 22, was notified of the investigation earlier this year. Ferry said the company was cooperating fully with investigators but he would not go into specifics of the probe.

"All I can tell you is we are looking at the situation with Kmart to see if there are any criminal violations," FBI Special Agent Dawn Clenney said yesterday.

"We have to have some time to review documents."

The Securities and Exchange Commission is also looking into the company's accounting practices.

Jerry Reisman, a corporate fraud expert with the Peirez and Reisman law firm in New Jersey, said it was unusual for the FBI to join the SEC in investigating a business as large as Kmart.

On Wednesday, the discount retail giant reported a $2.42 billion loss for the 2001 fiscal year. The massive loss was partly the result of a change in how the Troy, Mich.-based company accounts for vendor discounts.

The company announced its change in accounting methods after the SEC received an anonymous letter purporting to be from employees.

Arun Jain, a marketing professor at the Buffalo School of Management, said the investigation could further hurt the company's chances of making a comeback.

"It doesn't sound very good, because the FBI doesn't investigate any company casually," he said.

However, other analysts said Kmart's accounting problems did not appear to be that serious.

"A lot of times with these things it gets worse before it gets better, but I don't think that's the case here," said Mike Porter, a retail stock analyst with Morningstar.