Kmart
Kmart is one of the Unites States’ largest chains of discount department stores. In 2001 the company faced an accounting failure which consisted in its administration’s generating additional allowances and then recognizing them prematurely, which resulted in understating the costs of goods, as well as overstating the earnings, and, consequently, overstating the net income by 24 million. In order to avoid this failure, Kmart’s management and the vendors should not have falsified the documents and mislead the accounting department by stating that the allowances under consideration were obtained as a result of past performances. Instead, it would have been better if the company recognized the allowances over the time of the agreement, as stipulated by GAAP policies which Kmart is expected to keep to. Thus, Kmart should have recognized the allowances when incurred, rather than after receiving the cash.
There are two major lessons which can be learned from this accounting failure. First of all, generating additional allowances should take place only under exceptional circumstances. Kmart resorted to this method due to its inability to meet gross margin numbers, while instead it could have, for instance, increased its outputs to cover the losses by means of improved performance in the following quarter of the year. And secondly, recognizing the allowances prematurely can be avoided if the organization’s management, as well as its vendors, does not falsify information when compiling documents and reports for the accounting department. The company which does not take these lessons into account is likely to run bankruptcy and, just like Kmart, have problems with law. Though none of the Kmart’s executive officers was penalized or imprisoned, such accounting failures should still be avoided.
Duke Energy
Duke Energy is the third largest energy company is the United States. Despite being quite successful for several years, the company faced an accounting failure in 2002 due to some of its traders making “wash” trades at this recording winning and unprofitable trades separately and, thus, using two accounting methods, which is unacceptable (though it turned out to be beneficial for the company due to its possibility to recognize profits and deter losses simultaneously). Avoiding this failure could have been possible if Duke filed valid financial statements or at least if Deloitte & Touche did not certify their statements; this would not result in these statements’ being misleading and in overstatement of the company’s revenues. In addition, if the company management kept trace of the “wash” trades, the failure could have also been prevented.
Two lessons can be learned basing on the Duke’s accounting failure. First of all, the performance of any company should be carefully evaluated with annual reports being compared each year and suspicious revenues being traced. The fact that the company’s employees have been executing roundtrip trades for the period of 32 years shows that the management either does not follow the activities of its employees, thus, putting the company at risk, or that the management is aware of these “wash” trades and is even their participator. And, secondly, using two accounting methods, though it may seem beneficial and convenient, is inappropriate because it inevitably results in misleading financial reports which are compiled on the basis of the falsified data. Therefore, only fair reporting about revenues and losses can help to avoid problems with law and can guarantee long-term success to a business enterprise.