There’s obviously deep embarrassment at Wesfarmers over the attempts by unnamed Target employees to inflate the retailers’ first-half earnings by almost 40% by colluding with about 30 suppliers to book extra rebates in return for promises of higher prices.
For a company that prides itself by doing everything properly by the book, with good, robust processes, controls and people in place, the profit fiddling is a huge loss of face, as CEO Richard Goyder made clear in a statement yesterday.
The allegations were first raised by the Financial Review last month, confirmed by Wesfarmers in announcing an investigation, and further confirmed late yesterday in a release to the ASX.
The story is that certain Target employees had agreed to get rebates from certain suppliers to make the December half year interim profit look better than it was, and then repay those rebates in the last half of the year through higher prices, thereby achieving a netting out of the impact over the financial year.
Wesfarmers said the investigation by its external auditors Ernst & Young had found that rebates of $18.1 million for past activity and subsequent product cost increases negotiated in December with 31 overseas suppliers did not meet the group’s accounting policies and operating standards.
And on top of that, further supply arrangements amounting to less than $3 million were found to not comply strictly with the group’s accounting policies.
Wesfarmers said in its statement that while these arrangements had no cash flow implications for Target for the six months ended December 31, they boosted earnings by $21 million or almost 40% during the period.
Target’s earnings before interest and tax would have been $53 million in the December-half compared with the $74 million reported.
Wesfarmers’ group net profit would have been $15 million, or 1.1% lower than reported, and in line with the previous corresponding period.
For the year ending June 2016 the arrangements would have had a negligible impact on the Group’s and Target’s financial results, as any benefit recorded in the first half would have substantially reversed over the second half of 2016 due to higher product costs.
Mr Goyder said Target’s new management team was now working with suppliers to unwind the arrangements and ‘appropriate action’ was being taken against the Target employees who were found to be directly involved.
In the statement he expressed his disappointment with the actions of those involved.
"There is no excuse for this conduct," Mr Goyder said.
"We set very clear direction and expectations at Wesfarmers crystallised in our Code of Conduct, and supported by detailed Group policies, divisionally specific accounting policies, and regular staff training," he said.
"We encourage and expect adherence to a strong culture of managing for long term sustainable growth over short term gain, which is regularly reinforced by the Wesfarmers Board and which should have guided behaviour."
"Wesfarmers will take immediate action throughout the Group to reinforce the importance of compliance with its policies and governance practices."
Target’s former managing director Stuart Machin has stated he was not aware of the accounting issues in the first half, but has accepted his share of the responsibility given his leadership role and has resigned from the Wesfarmers group.
Four Target executives have already left the group, including Graeme Jenkins, who had been finance director since 2013.
Mr Goyder told reporters: “So specifically on Graeme, if Graeme wasn’t aware he should have been aware and, as I said, he resigned late last year.”
UK group, Pets at Home on Monday announced last night that by mutual agreement Mr Jenkins would no longer be joining the group. He had been hired as finance director.
Wesfarmers shares eased 0.8% to $40.02 yesterday. The news was released shortly before the close of trading.
