Ace Hardware Finds $154 Million Accounting Shortfall


Ace Hardware discovered an approximately $154 million shortfall on its books while preparing to convert from retailer-owned cooperative to for-profit corporation and likely will have to restate its financial results for the last five years, President and CEO Ray Griffith said Wednesday.

Ace has called off the conversion plan and hired an audit consulting firm to help rectify an accounting problem which appears to date to 2002, Griffith told The Associated Press.

The company may have to forego returning profits to store owners this year as a result, he said.

He said no money or inventory is missing but the Oak Brook, Ill.-based company has not been able to determine the source of what he characterized as a "significant accounting error."

Ace notified the dealers who own its 4,600 stores of the problem in letters Wednesday from Griffith and its board of directors.

The chief executive said an internal review of the company's financial documents found that its inventory total is $154 million less than its general ledger balance -- the company's primary method for recording its financial transactions. The final total is expected to be somewhat less.

He said the error amounts to "an overstatement of gross margin that resulted in an overstatement of gross profits that resulted in an overpayment of patronage dividends."

"There is no missing money, there is no missing inventory, there is no evidence of theft," Griffith said in a telephone interview.

"Obviously we're upset, but we feel very confident that it's a manageable situation and that our business is sound. We're still a very viable business, our comp sales are doing well. This is an accounting issue."

The company's board of directors hired Protiviti, he said, to find and reconcile the error.

Griffith said he was first informed of the problem on Aug. 16 by Ron Knutson, Ace's vice president of finance, and Art McGivern, senior vice president for legal affairs.

Plans for the conversion, which were announced two weeks later, went ahead while Ace executives continued looking for the source of the error.

"I immediately thought it was simply a balance sheet issue, a mistake that we would find," Griffith said. "There was probably a little bit of denial there."

He said in the letter to store owners that Ace may hold back "most or all" of its profits this year that it normally distributes to store owners as patronage dividends, considering them to have been paid previously and erroneously. Retailers received $108.8 million through that practice last year.

"This issue will not impact Ace's ability to provide you with the merchandise and services you expect from Ace; we will continue serving all of our retailers as we do today," he assured them.

Ace's bankers have been informed and have pledged their financial support, Griffith said.

The company's auditing for the years in question was performed by  KPMG. KPMG spokesman Dan Ginsburg said the company could not comment due to client confidentiality.

Ace's directors said in their letter that the board was "extremely disappointed" to learn about the financial reporting error.

"Ace's finance staff, seasoned management team, internal audit department and even the external auditors engaged by the board failed to detect this error as it built over the last several years," they said.

The 83-year-old hardware chain, which has been a retailer-owned cooperative since the 1970s, had its best sales year since 1998 last year with wholesale sales up 6.5% to $3.4 billion. Its stores, about two-thirds owned by independent dealers, racked up almost $12 billion in retail sales.

The hardware business is now dominated, however, by Home Depot and Lowe's , the two home improvement store chains that had a combined $138 billion in sales last year.