Enio Montini and Joseph Hofmeister, who ran K-mart’s drugstore division, have been accused of improperly accounting for greeting card sales under a contract with American Greetings.
Montini and Hofmeister were also indicted yesterday by a US federal jury for fraud, conspiracy, and making false statements.
Under the contract, American Greetings made a $42m payment to K-mart for the sale of its greeting cards over an eight-year period.
K-mart recorded the entire sum as a sale for a single quarter, bolstering its results for the period, while the greeting card company offset the payment by the actual sales of the cards over the term of the contract.
But under US GAAP, the payment, know as vendor allowance, should have been recorded over the eight-year period.
The sale was recorded during the quarter ending in August 2001. Five months later, K-mart filed for bankruptcy.
Questions on revenue recognition on advance sales were raised last week with the Harry Potter advance booking frenzy.
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