RISK MANAGEMENT

Accounting Tricks: Lessons from Walmart China’s Scheme to Inflate Its Results

The big bosses at corporate HQ are on your back again. They keep reminding you: The company is counting on emerging-market businesses to bring the growth and profit. That’s what we promised the markets and that’s what we expect from you and your team.

It’s a familiar pressure CFOs in Asia often feel, whether exerted subtly or openly. And, apparently for some, the response has been to deliver no matter what – or at least to be seen to be hitting targets even though in reality they are not.

Some people in Walmart China resorted to accounting tricks to dress up the financial results

This seems to have been the case at Walmart China. Bloomberg spoke to Stanford Lin, a former McKinsey consultant who conducted an internal review of the China business in 2010. He left Walmart China last year to become head of Chinese operations for Visa, the credit card payments company.

“There was a huge desire to perform,” Lin told the news agency. “There is a general flexibility on ethics.” As he tells it, some people in Walmart China resorted to accounting tricks to dress up the financial results, making headquarters think China was doing great even during the global financial crisis.

Was finance part of the scheme? CFO Roland Lawrence left Walmart in 2011, along with CEO Ed Chan, COO Rob Cissell, and VP for Operations China Shawn Gray. Lawrence, now VP Finance for Asia at Carslberg Breweries, did not return Bloomberg’s phone calls and emails. Walmart said at the time of his departure that he left “to seek new development opportunities.”

The CFO could have been genuinely unaware of the unusual and possibly illegal accounting and financial stratagems that Lin says he discovered in Walmart China. If so, it raises questions around the competence and diligence of the finance organization. Neither Lawrence nor the other resigned executives have been accused of any wrongdoing.

Mark it up, mark it down                                                                                    

Lin was assigned in 2010 to Walmart’s Strategy and Innovation Team to find ways to improve the China operation’s productivity and reduce headcount. He travelled across the nation – Walmart had more than 200 hypermarkets and stores in China at the time – and asked employees in 98 outlets what activities they thought were wasting their time.

One answer caught his attention. In some stores, workers said they were ordered to change the price tags of thousands of goods in the last week of the month. Then, in the next month, managers ordered them to change them back again. They were given 24 hours to complete the task.

In his 32-page report, Lin singled out the housewares division, which marked up the prices of 183 items in the last week of December 2010. In theory, the mark ups would increase gross profit by RMB2.5 million (US$408,000 at the current exchange rate).

But at the start of January 2011, the prices were marked back down. It appears that realizing higher margins (which would have negated Walmart’s low pricing strategy) was not the objective. The aim was apparently to be able to apply a higher valuation to ending inventory and then a lower valuation to beginning inventory.

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