Letter Alleges Accounting Irregularities at Kmart

Kmart Corp. said Friday that the company and federal regulators are investigating an anonymous letter that suggests there may have been corporate accounting irregularities.

Troy, Mich.-based Kmart, which on Tuesday filed for Chapter 11 bankruptcy protection, said it contacted the Securities and Exchange Commission upon receiving the letter a little more than a week ago.

The company said it has hired accounting firm Deloitte & Touche to investigate the matter independent of Kmart and its regular auditor, PricewaterhouseCoopers.

The SEC declined to confirm or deny an investigation or receipt of the letter, which Kmart said claimed to be from employees and was addressed to the SEC, Kmart’s board of directors and PricewaterhouseCoopers.

SEC officials, however, told Kmart that they had launched an investigation and will be requesting company documents, said Kmart spokesman Jack Ferry.

“The letter doesn’t contain any specifics and there’s no point in trying to speculate what was intended,” Ferry said. “However, we take all matters of this nature very seriously.”

Suggestions of accounting improprieties are particularly sensitive after the collapse of Enron Corp., whose executives have been accused of misleading the public about the company’s health by using complex accounting schemes that eventually cost thousands of employees and others their retirement savings.

Although the Enron debacle also featured an anonymous letter alleging improprieties, the note in the Enron case contained specific allegations and was written to the company’s then-chairman, Kenneth L. Lay. Vice President Sherron S. Watkins later identified herself as the writer.

“Kmart has inventory, stores and employees, meaning that there’s very little opportunity for the accounting chicanery like the type we saw in Enron, which had a lot of complex trading assets,” said Martin Zohn, a bankruptcy attorney who specializes in retail reorganization with the Proskauer Rose law firm in Los Angeles.

“It could be like increased vigilance after Sept. 11--now employees and the public are watching for this kind of accounting fraud and it may be that they are seeing accounting terrorists where they don’t exist.”

Analysts also noted that complaints to the SEC have long been commonplace, especially when a stock under-performs or a company reorganizes.

Kmart on Tuesday became the nation’s largest retailer to file for bankruptcy protection, after a poor holiday showing and months of weak sales that cut the company’s cash flow and eroded confidence among investors, vendors and lenders.

Kmart listed $16.3 billion in assets and $10.3 billion in liabilities in its bankruptcy petition, and analysts are expecting that Kmart will close hundreds of under-performing stores and lay off thousands of its 250,000 employees in a bid to reorganize and compete with rivals Wal-Mart Stores Inc. and Target Corp.

Kmart shares dropped 8 cents to close at 85 cents on the New York Stock Exchange.