Target’s backroom deals with suppliers made it look $21 million better off

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Backroom deals by Target with its suppliers made the retailer’s earnings look $21 million better than they should have been, according to an internal investigation by owner Wesfarmers and its external auditors Ernst & Young.

The deals essentially meant that suppliers sent cash back to Target in the form of rebates in return for promises of higher prices at a later date. This boosted Target’s earnings by 40% to $74 million.

The investigation has already claimed one scalp, that of managing director Stuart Machin who has resigned from Wesfarmers.

Machin, who spent eight years at Kmart and Target, has denied knowing about any collusion. “I have been dismayed to learn of the accounting issues at the half year. I was not aware of these, but they happened on my watch and as managing director I accept my share of the responsibility. The right thing is now for me to move on,” Machin said in a statement.

Today Wesfarmers said: “Appropriate action is being taken against the Target employees who were found to be directly involved.”

Wesfarmers announced in February a restructure of Kmart and Target into a single division led by Guy Russo as Chief Executive Officer and Marina Joanou as Finance Director. Machin had been due to finish in July and be placed in another, unspecified, position.

The investigation has found that agreed rebates of $18.1 million with 31 overseas suppliers in December did not meet the company’s accounting policies and operating standards.

And a number of supply arrangements amounting to less than $3 million have also been found not to strictly comply with the group’s accounting policies.

The deals, which were not disclosed to Wesfarmers or its auditors, had the effect of supporting additional income of $21 million in Target’s earnings for the half year to December.

Without them, Target’s EBIT (earnings before interest and tax) would have been $53 million rather than the the $74 million reported.

However, Wesfamers says the financial impact would “not have been material”. Earnings after tax would have been $15 million or 1.1% lower than reported and in line with the previous corresponding period.

Target is now working with suppliers to unwind the deals.

Wesfarmers managing director Richard Goyder says he’s disappointed with the actions of those involved.

“There is no excuse for this conduct,” says Goyder.

“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. 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.”