The Target accounting scandal and its wider implications
Chris Sheedy reports from Australia on the Target accounting scandal, and the broader implications for the industry and business world.
As if a 70% decline in earnings over the past five years wasn’t bad enough, Australian discount department store Target has been hit by an accounting scandal.
In mid-April, Wesfarmers CEO Richard Goyder confirmed the fact that the head office of retailer Target would be relocated from Geelong to Melbourne within the next 12 months.
The small city of Geelong, a satellite of Melbourne, will certainly feel the loss of 900 local jobs, as Goyder is perfectly aware. But the recent accounting scandal within Target appears to have been the last straw. In order to introduce full cultural change, he believes, the business requires a physical shift.
“We will relocate the Target head office somewhere west of Melbourne in the next year or so and that's so we can attract some of the people we want to bring into the business,” Goyder told The Australian Financial Review. “And frankly we do want to drive some change through the business.”
What exactly took place in the Target head office that could engender such a swift and serious response, including the arguably meaningless exit from Wesfarmers of its ex Managing Director, Stuart Machin (he was on leave at the time, having stepped down from the top job at Target earlier in 2016)? Put simply, the variety store inflated its first-half earnings by $21 million, or almost 40%.
The Australian newspaper reported on 9 April that parent company Wesfarmers was investigating several Target executives. The allegations were that as many as 30 offshore suppliers had rebates requested, after a promise that the money would flow back to those suppliers via higher prices in the second half of the year, or later. The purpose of the scheme was to boost first-half earnings.
Goyder, who ironically in March this year publicly called for a more rigorous framework for responsible fiscal policy for the Australian parliament, branded the creators of the scandal as “mind blowingly stupid”. And it’s difficult to argue. After all, the increased first-half earnings would have washed themselves out in the second half.
It is important to point out that Richard Goyder is famously strict in his fiscal management and policy-making within Wesfarmers. The Australian Financial Review reported on April 11 that Target has “a clear company policy against delivering short term profits”. Wesfarmers under Goyder has earned a valuable reputation for integrity in business.
The writer also pointed out, in agreement with Goyder’s statement about the “mind blowingly stupid” nature of the plan, that the perpetrators ignored the obvious fact that the new CEO Guy Russo, introduced after Machin had stepped down earlier in the year, would want to baseline the profit figures rather than inflate them.
Wesfarmers is a conglomerate that includes Coles supermarkets, Bunnings and Homebase home improvement stores, Officeworks office supplies stores, many major industrials, and discount department store Kmart.
In fact it is the current success of Kmart (which Russo is also responsible for) that is arguably the biggest thorn in Target’s side. Conversely, now that Russo is overseeing both brands and is expected to find efficiencies and performance boosters by merging some of their support functions, Kmart could also be the answer to Target’s problems.
The wider implications
What about the broader implications of the scandal for the accounting industry and its regulations?
If such a visible business in a strict corporate environment overseen by one of the nation’s best-respected business people is able to develop a culture in which such ‘cooking of the books’ can take place, what does this say for the rest of the business world?
Some pundits believe it will likely result in a tightening of rules and regulations around the autonomy given to executives who have responsibility over satellite businesses, and to their accounting teams.
Others say a greater accountability, or at least obligation, will flow on to external auditors who will need to police their clients’ figures more closely.
This is not the first and will not be the last of such stories to make headlines, damage share prices and to cost executives their bonuses and/or jobs.
Perhaps the greatest lesson to come out of it is the fundamental importance of corporate reputation, yet another area in which accounting plays a central role.