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Has Walmart Been Engaging in Large Scale Accounting Fraud?

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We’ve been poking at Walmart of late because the Bentonville giant appears to have feet of clay. It has been pursuing its relentless cost-cutting strategy to the point where it is damaging its franchise. Bloomberg (and later, the New York Times) described how the retailer had cut headcount to the point where it was having difficulty keeping shelves stocked and checkout lines to a tolerable length. Proving the validity of the Bloomberg account, over 1000 Walmart customers e-mailed the news service, describing their crummy experiences.

Walmart, in a classic demonstration of the behavior of an out-of-touch management, sternly denied the customer complaints, asserting that its impressively-large sounding customer surveys were more accurate and proved all was fine. Astute readers described how surveys like that could be and likely were gamed by store managers.

Walmart is an easy target for criticism. It’s a classic corporate welfare queen pretending to be the face of capitalism. It is the top driver in the increasing use of food stamps. Per a workforce study quoted in Daily Kos:

Wal-Mart’s poverty wages force employees to rely on $2.66 billion in government help every year, or about $420,000 per store. In state after state, Wal-Mart employees are the top recipients of Medicaid. As many as 80 percent of workers in Wal-Mart stores use food stamps.

It plays communities off against one another to get subsidies for new stores, when the primary beneficiaries are the local builders. Walmart is a wage reducer and business destroyer, so it’s hard to see how (once construction is completed) that it is a net plus to a community, unless it sucks revenues away from businesses in neighboring towns.

But Walmart is looking increasingly like a corporate one-trick pony. Anyone who has spent much time in big companies will recognize the symptoms: the environment changes, or the current strategy has simply run its course, leaving the company bereft of growth opportunities, and all management seems capable of is doing what it did in the past, only harder. Hence Walmart’s cost cutting to excess.

But Walmart may have started going off the rails even earlier than the counterproductive staffing cuts suggest. A story in Nation, on a whistleblower lawsuit, buries the lead. The title is “Former Walmart District Manager Accuses Company of Widespread Inventory Manipulation.” But if you understand the allegations, what he is effectively charging them with is accounting fraud, since that was the motivation to tinker with the inventories, to report better financial results.

And rest assured, inventory manipulation can rise to the level of accounting fraud. One classic technique is “channel stuffing” which is making shipments to customers and counting them as sales even if the shipments are in advance of orders. For instance, the SEC sued Bristol Myers for improperly reporting $1.5 billion in revenues resulting from selling excess pharmaceutical inventories to its two biggest wholesalers at the end of two quarters. Bristol Myers paid $150 million to settle the charges.

Now the problem with this sort of activity is that you get a one-shot gain, and you have to continue to engage in similar types of behavior to keep from having to reverse it. Say, as Bristol Myers did, you move $100 million in sales from the next quarter to this one by shipping extra product. So if your revenues, before your clever trick, would have been $800 million this quarter and $815 the next, you’ve just made them $900 million this quarter and $715 the next, unless you steal revenues from the quarter after next. And if you have growth targets, you might not just need to keep rolling $100 million forward now that you’ve gotten yourself on this treadmill, you’ll likely find it necessary to increase it to keep your pretty phony growth pattern going.

Let’s look at the Walmart charges. Sylvester Johnson worked in Walmart’s headquarters, got significant awards for his performance, and became a manager of 11 supercenters in North Carolina in 2003. He was fired in 2009 for manipulating inventory counts. Johnson says the claims are false, that he was outed for resisting pressure to misreport inventories, and was ousted for his resistance. From the Nation (hat tip Economystic):

“We’re talking about hiding tens or hundreds of millions of dollars in losses here—inflating the profits of a store, a district, a region, a division and ultimately the entire company,” Johnson told The Nation. In theory, such a practice could have artificially inflated the company’s profit margins and stock price, amounting to a form of federal securities fraud.

Johnson claims that during his tenure as a Walmart district manager he was pressured by the company’s high command to hide losses due to “shrinkage”—defined as lost or stolen inventory—in order for stores to appear more profitable than they really were. Throughout the course of over six hours of interviews with The Nation, Johnson maintained that top management set shrinkage targets for Walmart Supercenter stores under his supervision that were “not ethically attainable” and then used methods of “fear and intimidation” against him in an attempt to compel him to meet those targets. Shrinkage represents a loss to any firm’s bottom line. It is a major factor in retail profitability…

In June of 2008, a company executive named David Carmon took over as Walmart’s Regional Vice President for North and South Carolina. Johnson claims that, at the time, some stores in his district were losing about a million dollars in shrinkage annually. Carmon instructed him to cut his stores’ shrinkage rates in half—a target that Johnson felt was impossible to hit without resorting to unethical and illegal accounting practices. According to Johnson, Carmon warned of repercussions if Johnson’s shrinkage rate did not fall. “He threatened everybody that if you didn’t get your shrink down, you were going to be terminated,” said Johnson in a court deposition. Speaking to The Nation, Johnson said that Carmon used “tactics of fear and intimidation, and everyone looked the other way.”

Johnson says that recorded shrinkage rates reduced to incredible levels in regions that Carmon oversaw. Carmon left the company in 2010, according to his LinkedIn page, which touts his achievements in reducing Walmart’s shrinkage rates in the Carolinas: “I successfully led some of the company’s largest operating units through remarkable growth and expansion, delivering strong and sustainable financial results. Most notably, the North and South Carolina region responsible for $15.5B in sales has seen a $60M+ reduction in shrinkage loss…”

Although the Nation story does not unpack all the details, Walmart curiously started investigating Johnson, who was one of the few black managers in the company, for manipulating inventory accounting in 2008. One imagines that Carmon anticipated that Johnson would go to higher ups and decided to get out in front of it. Johnson alleges the inventory gamesmanship was widespread:

Johnson says he reviewed the shrinkage rates of over 400 Walmart stores around the country and was astonished at what he saw: impossibly low inventory loss rates to the point that stores would commonly display a negative rate of shrinkage, known as on “overage.” An overage occurs when records show quantities of inventory on hand greater than what was shipped to the store—a sign of either accounting or shipping errors, or deliberate fraud.

“It was a standard practice to look at [the shrink rates of] other stores because everyone competes with each other,” Johnson said.

“When you see these overages in there that clearly should be investigated but the regional VP is saying ‘this is exactly what we’re looking for,’ or ‘outstanding job,’ it is a point of concern,” Johnson said. “I think there is an unspoken culture at Walmart that a store is allowed to have excessive overages if it makes that store and the company look more profitable.”

“This could conceivably be done in some systems,” says Stephen A. Smith, a professor at Santa Clara University and co-editor of the book, Retail Supply Chain Management. “Walmart is famous for having really good information technology systems so that makes it hard to imagine, but maybe someone found a way to do it.”

Johnson has obtained information about the inventories in North Carolina and South Carolina, and is seeking to obtain information from other regions to show it was a company-wide practice. Needless to say, Walmart is fighting his requests.

If Johnson is right, this means Walmart was engaging in desperate measures to maintain its profit targets in 2008. And this would relate to their current self-inflicted wounds directly. First it points to a culture willing to take considerable risks to maintain the illusion of profitability. Second, it has direct implications for inventory management (emphasis ours):
“You could make your profitability look better by doing things like not reporting shrinkage, that’s true,” says Paul Huppertz, Partner at the Progress Group, a distribution and logistics consultancy. “But I struggle to understand how long you do that before you run into major bookkeeping issues.”

Huppertz says that consistent errors in inventory recording would make it difficult for any large company to keep its supply chain working efficiently. He has never heard of a company obscuring shrinkage loss to appear more profitable.

Now Johnson is arguing that he was terminated for race, not for being a whistleblower, since he never got that far. That might not be as bad a case as you think. This theory presumably would allow Johnson to demand the information necessary to have his records regarding how he accounted for inventories and managed the inventory shrinkage reduction program compared to other managers at his level. He might indeed be able to show that he was treated differently than white managers who had records similar to his. But the real issue is that Johnson does not need to get that far. This is the sort of case where he can do tremendous damage to Walmart in discovery. If the judge agrees to force Walmart to divulge inventory records from other regions, and they are as damaging as Johnson alleges, I’d expect Walmart to gear up settlement talks the second the judge’s order comes down. The last thing Walmart would want is to have that sort of information become public because it can open up very costly cans of worms.

I hope Johnson prevails in his discovery requests, and if he does, that he and his attorney understand the leverage they have over Walmart and use it to extract a rich award. Unfortunately, that means, either way, we are unlikely to learn the truth of Johnson’s allegations, unless, say, Mary Jo White decides to use this case to prove her bona fides. Either Johnson loses his request to get information about the other regions and has difficulty arguing his case or he prevails, and Walmart does what it needs to to shut the case down. But if Johnson is right, it means the rot at Walmart is more advanced than even its worse critics might realize.

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91 comments

  1. Clive

    With credits to Alcoholics Anonymous (from where the original parable comes from that I’ve modified here):

    The enterprise makes a fraud
    The fraud makes the enterprise
    The fraud makes the fraud

  2. Ferrous Male

    Inflated inventory counts could also lead to empty shelves. If WM’s accounting shows that a store has a shelf full of product, then that phantom product is probably not going to be replaced, save for an accurate audit/inventory. Much more damage than channel stuffing, because this would come at the cost of future sales.

    1. ambrit

      Dear Ferrous Male;
      Yes, exactly what’s happening at the DIY Boxxstore I am indentured to, I suspect.
      We have the same ‘empty shelf’ syndrome, with concomitant camouflage strategies. The palpable fear in the managerial class in our store fits the scenario also. What’s not often remarked is how that fear “trickles down” to the average floor worker. Wondering why the service at your local box store is so surly and rude?
      More importantly, ‘follow the money’ comes into play here. Last fall, the ‘glorious’ CEO of our outfit sold 78 million US of stock options into a new higher priced company stock ‘bubble.’ The stock is roughly tracking the Dow Jones average. When the stock market ‘corrects,’ (that is the proper term, eh,) I’d be interested to see if our companies stock tracks the market down, or goes into a free fall, all of its’ own.
      Now here’s a real wet dream of a class action suit; the employees of a company sue the present and former upper management for clawback of “illegal and excessive” individual earnings.

      1. Up the Ante

        My, my. The very description of Ambivalent Store Managers. And their use of store security cameras to ‘suppress’ outsiders.

        “The palpable fear in the managerial class in our store fits the scenario also. What’s not often remarked is how that fear “trickles down” to the average floor worker. Wondering why the service at your local box store is so surly and rude? “

      2. casino implosion

        Empty shelves, terrified management, purges, beaten-down workers pretending to do a days work for a day’s pretend pay…In Soviet Walmart, inventory shrinks you!

    2. Richard Kline

      Speaking to the points of both the retailing Prof. Smith and the logistics consultant Huppertz cited in the quotes, Walmart is actually in a _better_ position than most corporations to game their shrinkage exactly BECAUSE of their ‘famously tight inventory management.’ Yes, getting bogus inventory counts in your flow can kill you, but if you’re actually micro-monitoring the grift, then the corporate higher ups are in an at least temporarily stronger position to ‘double entry’ their order flow.

      That hypothesis, and it is an hypothesis, would attribute to senior management in Bentonville a prime role in this inventory gaming. . . . WMT senior management _must_ know that shrinkage numbers are off if their inventory controls are meaningful, and hence this can’t be merely a scheme of regional corporate hierlings to get promoted. But then, my view on ‘the never ending profitability of WMT’ is that the real goal is to keep the stock price up rather than to fine-tune store and regional profitibility. In other words, it’s a stock manipulation scheme more than an inventory scheme if the shrink-the-shrink program is real.

    3. Jeff N

      ooo… where there’s smoke, there’s fire.

      where are the auditors on this? isn’t the first thing an auditor does is some random cycle counts?

      1. dw

        they probably did do that . but if you look at the audits you discover a very telling thing. the auditors do not go into the facilities to do the counts, they accept managements counts.

        1. KM

          Actually, the auditors send their newest and least knowledgeable people to “observe” the inventory counts that the company does itself. These could be gamed if the company knows, with a long enough lead time, at which stores the auditors will observe counts.

          When I was a brand new and very green auditor, at a then Big 5 firm, I was sent to observe the regular inventory counts at several locations of a big regional division of a national department store chain. We performed the same observations for each regional division.

          What happened was that I, and the two others with me, walked around watching the client staff count items, re-performed a specified number of counts, and took notes of anything we saw that was unusual. Since we did this during normal business hours it would have been trivial for the client staff (if so inclined) to move inventory from one location to another to fill out a store without sufficient stock. While we did split up to separate stores after the first day, it was only a three day observation in a single metro area and used only three new and green members of our staff. Also, the client knew at which stores we were observing and provided us with the inventory system numbers we did our re-counts from.

          Accounting controls are only meant to prevent individual fraud. When you have a whole managerial layer incentivized to regularly game their numbers you’ve already inculcated a culture of fraud. It should be little effort to then get the store and district managers to make sure that a bunch of green audit staff see what they need to see knowing all the while that if the results in their region/division are not good enough people will get fired.

          That said, something like this is easier to talk about than to do. Systemic inventory fraud like that would be harder to conceal than a couple off balance sheet entities if the inventory problems are company-wide accross a behemoth like Wal-Mart. People talk and lots of people talke a lot.

      1. American Slave

        Wow I didn’t know it but that wiki article is about the worse description of the great leap forward I have come across. The benefit the farmers got from a commune was that seeds, fertilizer and other inputs including tractors were provided for free from the government which came from the cities.

        http://www.youtube.com/watch?v=kBjpRpXVM6E

        That is about the best English language documentary of the great leap forward I have seen but it’s a CIA film so it still has propaganda but note the part where he talks about the 7hr work day and women having time off to feed there children all going on during the great leap forward.

    4. Veri

      Interesting. Since I returned to the States, just about everything I try to find, in order to purchase it; I end up using purchasing from a website. Oft times, the store I go to for common items simply do not have the items.

      I’ve even encountered a few instances where a store inventory system will say the item is in stock, yet when the “associate” goes to grab the item, they come back bewildered and confused – and empty handed. Then I’m told to go to the website and purchase.

      This problem is far more widespread than people probably even suspect.

  3. skippy

    When you sniff a bit of odious smell coming from a labyrinth like enterprise… do you know… how close or far away from the offending source[s – one is – upon first stenches intake?

    Skippy… decades ago a man told me… I can afford to break the Law… you can’t… live accordingly….

    Spartacus Blood and Sand: Spend Coin to Receive Coin

    http://www.youtube.com/watch?v=NJtZ-WHEgrE

    1. ambrit

      Dear skippy;
      A few years ago, didn’t a French cat famously say: “L’etat, c’est moi.” It didn’t end up well for his family a few years later, I recall.

        1. skippy

          @above… Homage to Augusto Pinochet

          On January 3, 2011 it was discovered that the entrance to one of the holding corporate buildings of Walmart Chile had a plate in homage to Augusto Pinochet, ex-Chilean dictator responsible for various human rights abuses,[132] only after much controversy Walmart Chile decided to remove said plate.[133] – wiki

          Skippy… for more good times find out what country’s they prefer to expand into…

          http://en.wikipedia.org/wiki/List_of_assets_owned_by_Walmart

          More stuff…

          http://makingchangeatwalmart.org/factsheet/

  4. jake chase

    Nothing shocking about any of this. I would not be surprised if every retail corporate behemoth uses similar tricks to support its stock price, since the whole idea is for executives to buy the stock cheap using option giveaways and unload it at inflated prices on institutional investors obsessed with earnings forecasts, before the shit inevitably hits the fan.

    Accounting has become another public relations fantasty. Walk into any one of these giant retailers for the same experience: short staffing, shelves packed with shoddy, useless crap, shortages in whatever you hoped to find there, grotesquely inflated prices.

    Whatever you expect to need these days, better buy two of them while supplies last. I think what is really happening is the exposure of every bit of business school bunk peddled during the past forty years. Our corporate emperors have no clothes and it won’t be long before we are all forced to make our own.

  5. craazyman

    Oh man this is bad. What if you’re working there for food stamps and refuse to pilfer out of moral principle.

    The other greeters and cashiers take stuff like fire extinguishers for the mobile home, window AC units and cases of bottled water.

    Then when you’re all dead and down in hell, you see they’ve somehow managed to bring all the right equipment for the circumstances while you’re just there with your shirt and pants. That would really suck.

    Otherwise, I don’t know how this makes sense as a long term earnings fraud. They probably played games for a few quarters but if it keeps going, like one of the individuals quoted in the post said, the numbers get too big to manage.

    Unless everything is outright lies. That occurred to me yesterday. What if they found 5 years of missing economic data on a 700 page computer printout that fell behind a desk at the Bureau of Economic Analysis. The economy is actually 30% smaller than they thought. Would it make a difference? I’d say no. It would be too confusing and people would ignore it.

    1. Yves Smith Post author

      Funny you mention the BEA. Shedlock teased a spreadsheet out of the BEA in 2005:

      I contacted the BEA today asking for the latest hedonic and imputation measurements. They pointed me to some online articles and tables and emailed me an Excel spreadsheet. Unfortunately the figures are severely behind and the latest numbers for imputations was from 2003. The most current figure I have for hedonic adjustment to the GDP is 2.257 TRILLION dollars which is roughly 22% of the GDP.

      http://globaleconomicanalysis.blogspot.com/2005/05/grossly-distorted-procedures.html

      Now those adjustments do go back to 1987, if memory serves me right. So 30% through now is a good guess, might even be low.

      1. diptherio

        Actually, Mish totals hedonic and imputation distortions and gets this:

        OK Mish what is the Total Gross Imputed Distortion (TGID) of all this nonsense? Look on line two and you will see that it is a mere $1635 billion dollars. If we add in the Total Gross Hedonic Distortion (TGHD) of $2257 billion dollars you come to the conclusion that the Total Of All Distortions (TOAD) is a mere $3892 billion out of a total 2003 GDP of $11004 billion. Gee, it seems we are a mere 35% distorted. Bear in mind that is what the government readily admits to. My guess is that the real TOAD is far uglier.
        Read more at http://globaleconomicanalysis.blogspot.com/2005/05/grossly-distorted-procedures.html#ccOTJgRmLbE6gjqf.99

      2. craazyman

        I had a vague feeling the Mod Squad were untrustworthy criminals when they got off duty. Especially the dude with the big hair.

        I could have seen him dealing in $10 and $50 bags on the side, smoking a bit himself and maybe running a numbers racket. The girl might have been a Charles Manson follower or even a prostitute.

        It’s been a while and the memory fades, but their loyalty to law and order seemed tenuous. I can see them all being busted by Sergeant Joe Friday from Dragnet — and then given haircuts on the way to jail.

        Eventually they all might have joined the army.

        Now if they don’t cut the defense budget that might be the last job left in America once the machines take over everything.

        1. craazyman

          whao! just googled the wikipedia page and saw they were criminals! I had totally forgotten.

          What kind of role model was that for America’s youth?

          I was too young to be morally ruined by the show since I was probably watching Scooby-Doo or Gunsmoke, but I bet a lot of people were.

          It doesn’t matter anymore. Either the asteroid will hit dead center someplace in Indiana with a radius of destruction reaching out 3,000 miles, or the economy will collapse on its own.

          It’ll be each person, on their own, walking through a foot of ashes with trees burning everywhere. And it won’t be a time for philosophical reflection and the appreciation of nature.

          That time is now, so people better figure out what they think it all means, while they can.

          1. craazyman

            Because that’s what happened in the movie Deep Impact. It could be a comet too.

            A big rock, anyway.

          2. Bill Smith

            Nah. In Lucifer’s Hammer a comet plunges into the Pacific at Mach 20 and creates a monster tsunami in all directions.

            In Santa Monica, a world champion surfer dude decides riding the tsunami is the single item on his bucket list. It comes, he picks it up, riding the crest for 3 miles then goes face first into a downtown LA skyscraper. Nothing is cooler than that.

      3. Capo Regime

        Hmmm, as a former economist and half awake retiree this seems like a proverbial elephant in the room. If say the GDP is 20% overstated in the official pronouncements things are more dire than the oligarchs realize (or us proles). Similarly, if the EU does not use hedonics for adjustment then those feckless socialists are far better off than the U.S. Casual empricism should leads one to believe than the U.S. is a lot poorer than the data point out and relaviely poorer than the EU say when the hedonics are pulled out and compared apples to apples say. No doubt the journalists reporting unemployment in EU pbly assume (as do U.S. readers) that unemployment in U.S. and EU is measured in the same fashion. But hey, the fudged data allow the u.s. comintriat to have a gloat fest…..

      4. Bill Smith

        Fake Gubmint numbers probably deserve a whole main post, but I’ll add another bizarre one. How the CPI is weighted. (and prolly other similar measures like PCE and deflators)

        I happen to have the detail on the CPI calc here:

        http://stats.bls.gov/opub/hom/pdf/homch17.pdf

        Scrolling down to the “weighting” tables
        “Appendix 4. Relative importance of components in the Consumer Price Indexes: U.S. city average

        The total medical weighting in the CPI-U is 6.2%

        The “health insurance” component is .386% !!! Yes, POINT 3 8 6 PERCENT

        That would be big news to everyone, and IIRC, the Medical industry is 17% of GDP. So the BLS people must think we export most of it, or something.

        But I’m sure everyone will enjoy calculating their household income for a 6.2% weighting and a $10K Bronze Plan.

    2. Richard Kline

      Hah, that’s exactly how Bruttium became Calabria. It was too cognitively dissonant to admit that the real Calabria had been conquered by hostiles, so the remaining province was renamed ‘Calabria’ to keep the entry on the bureaucratic roles. Byzantine recounting, call it . . .

      And by ‘all a big lie, 30% smaller than stated,’ you realize, craazyman, thay you’ve just described Japan’s economy of the last 20 years? Or the final 30 years of the USSR’s economy? I’m of the view that at this point EVERY ‘official number’ is an official lie. Orwell wasn’t wrong when he focused on Newspeak as an integral, and indeed central, component of social control. And the New Right rethink between Goldwater and Ford absolutely focused on the necessity of the Big Lie, since if some facts didn’t favor the public interest or liberal opinon NO facts favored huge wealth or ultra-conservatism.

  6. YankeeFrank

    “Walmart is famous for having really good information technology systems so that makes it hard to imagine, but maybe someone found a way to do it.”

    Actually, “really good information technology systems” often translates to no paper trail, making such manipulation easier, not harder… and it usually doesn’t mean four dimensional databases (which track changes over time) with full auditing capabilities, especially if execs want “flexibility” in adjusting numbers.

    1. Richard Kline

      My view as well. ‘Good controls’ are MORE susceptible to manipulation rather than less.

    2. allcoppedout

      That’s the crux of it Frank. Even in the early 80′s those of us doing new technology installations soon found management wanted ways to stop them working. Our laughable motto, ‘Good management information systems are based on equality of access’ soon vapourised as our systems cut across existing management values and structures.

      1. Up the Ante

        Their Human Resources Dept., there’s their henchmen.

        Managers as ambivalent, HR as Indifferent.

  7. profoundlogic

    Why all the fuss? From 40,000 feet Walmart’s inventory and accounting practices look perfectly legitimate. The President himself says there’s no fraud here, so it must be true. Right?

    1. diptherio

      Agreed, from the proper height, all problems can be safely and easily ignored. I don’t know why everyone around here insists on taking a microscope to every little thing…

      From 40,000 feet, for instance, it is obvious that I do not take up any space at all, and thus should not be expected to pay any rent. My landlord, however, fails to see the elegant and profound logic of this. Some people…jeesh!

  8. weinerdog43

    Given Wal Mart’s decision to actually reduce staff, and crack the whip on the remaining serfs, I’m sure their current staff will not feel justified for bringing home a few items. After all, they’re all full time folks bringing home some big bucks. I would say shrinkage just can’t be possible at this beloved institution.

    ;-)

    1. RepubAnon

      Shrinkage is not limited to disgruntled employees – as more people get desperate, they’ll help themselves to a few extra items, especially if they can be resold.

      Another area of concern is physical inventory. If WalMart’s systems are so very good – they may tell employees how many items that they should expect to see on the shelf during physical inventory. Overworked employees save time by entering that number into the computer and keep going due to time pressures. (When I used to manage inventory, I was trained never to let the folks counting the stock know how many of each item was expected to be on the shelf for that very reason.)

      However, if entering the true numbers means time-consuming investigations and trouble, and ignoring any discrepancies brings praise and promotion, what’s a minimum wage employee and their immediate supervisor motivated to do? Especially after seeing the conscientious ones getting disciplined and/or fired?

      At some point, of course, they’ll take a big one-time hit, a few scapegoats will be paraded about and discharged, and some top executive will resign (taking comfort in a multi-zillion dollar golden parachute and the memories of those sweet, sweet bonuses). At that point, the process will repeat.

  9. Schofield

    And does that really sum it up as Skippy says that if we don’t break the law as indentured slaves we can’t afford to break the law? I think not!

  10. Carolinian

    Strikes me as rather fevered speculation based on limited evidence. Talk about burying the lead.

    “Huppertz says that consistent errors in inventory recording would make it difficult for any large company to keep its supply chain working efficiently. He has never heard of a company obscuring shrinkage loss to appear more profitable.”

    Doesn’t this quote mean that what the above post speculates to be true most likely isn’t?

    Btw I was shopping at Walmart yesterday and all I saw were employees stocking the shelves. They do seem to be a company that is allergic to bad publicity. On a purely anecdotal level I can report that the empty shelf problem much more noticeable a year or two ago than lately. The store does appear to have fewer employees lately and fewer customers, but visits to other local stores like Best Buy give a similar impression. It could just be that people aren’t buying due to the recession, which doesn’t get mentioned much in these Walmart deathwatch posts. The Agonist’s great Numerian has some meta on this and other trends.

    http://agonist.org/the-marginal-futility-of-debt/#more-103836

    1. AbyNormal

      Helen is that you…
      Is Wal-Mart choking off its customers?
      Newsday2013-04-03
      Wal-Mart’s poorly stocked shelves, few workers drive shoppers away
      Pittsburgh Post-Gazette2013-03-28
      THE COST OF CUTTING COSTS
      U~T San Diego2013-04-02
      Why Walmart’s shelves are empty
      Yahoo Daily News2013-03-28
      Wal-Mart Customers Complain Bare Shelves Are Widespread
      Bloomberg2013-04-02
      Wal-Mart’s Staffing Levels Criticized Over Not-So-Fresh Groceries
      CNBC2013-04-05

    2. Yves Smith Post author

      No one “respectable” was willing to endorse the idea that robosigning was taking place, or worse, that transfers to securitization trusts might be a massive fail prior to September 2010, either.

  11. mm

    Is nobody shocked at the idea of an average $1MM shrinkage loss per store??? As in the healthcare market, how much ‘free’ stuff is walking out the door that the paying consumer must then make up for?

  12. allcoppedout

    Soccer authorities have launched quite Draconian measures in anti-racism today. 10 match bans for players and shutting down whole sections where racist chants come from, then whole grounds if this doesn’t work. Hard to argue against – though once religious bigotry was almost the basis of Celtic – Rangers matches.
    We don’t treat the massive accounting frauds in banking and business in anything like the same manner. The writing was on the wall in the early 80′s – I’d say key literature exemplars were ‘In Search of Excellence’ versus ’100 Best Companies To Work For In America’ in low brow and the legitimation crisis debate (Lyotard/Habermas) in more philosophical consideration.
    Instead of using technology to create a competitive free trade system hard to cheat, we produced a cheater’s charter for the abuse of tax and pension money and business support through welfare. The rest was bubble Ponzi in which the cash flow came from asset price rises, and global wage arbitrage. Walmart is merely the prince of excellence.

    We have seen some re-payment of thieving in the banks (ppi, interest rate swaps), though this is really tax payer funded. What restitution is really in order for the wider thieving by the rich through banks and corporations? The sky, we should note, stayed in place before the megastores, megabanks and new accounting – even, as I remember, under retail price maintenance.

    Why are we more lenient on the rich than the soccer lout? There is an answer to this and it involves complex rationalisation on the need to keep our pirates operating with the latest weaponry and advantages in the rest of the world against ‘Johnny Foreigner’.

    1. NotTimothyGeithner

      I tried the google, but I can’t find the name of the author or his work with generic search terms. There is a Catholic historian who I suspect is Irish, and he has written about the Church’s relationship with polity in Ireland and its attacks on women over the years.

      When economic times are better, the Catholic Church tends to pass the collection plate and stay out of trouble, but when economic times are bad, the Church is quiet at first. What is happening the local priests are faced with dwindling collections and desperate parishioners. In turn they send word up the ladder to the Bishops. The Bishops get together and note the guys in charge have let things get out of hand. The Bishops conclude that they have to do something, but they recognize the guys in charge will blame them and their prada shoes if they say something about the guys in charge. They can’t have that. They can’t attack men because men might hurt them. They can’t attack married women or grandmothers because people protect their families. Who do they attack? Gays and single young female parents, mostly women because they don’t have families to fight back and its easier to call a 20 year old single mother a slut than a mother of 12 a slut. Soccer hooligans is the same issue.

      The historian noted this pattern repeats itself with subtle variations based on personality, and he called it “the safe sex option.”

  13. Mcmike

    Does local construction even benefit?

    My guess is WM brings in regional/state crews and relocates in-house project management to run the show. Hell, i bet they truck in their materials… (from China)

    So even that trickle down is limited to heavy equipment and laborers.

    1. PQS

      Well, as a contractor who has built a LOT of big box retail (but not Walmart), I can say anedcotally that every single GC and subcontractor I’ve ever spoken with on the West Coast who has worked for Walmart refuses to EVER work for them again. They are hardassed, criminally cheap, and don’t even think anything about organized labor around them. Plus they are totally demanding throughout the entire process to the point of grinding the contractor into a powder.

      Not a worthwhile client for a GC with any sense of self-respect.

  14. Jeff N

    Twice I have gone to walmart for something that their website said was on the shelf (on website as either “low stock” or “in stock”), but when I got there, there was nothing.

    I told the stock person to adjust their inventory down on their computer so that people like me would stop coming in for these items, but he/she told me that they “probably had stock this morning and the counts on the website will be updated by tomorrow”. In both cases, the stocks were *not* corrected on their website the next day.

  15. Banger

    Fraud is becoming the default business model of large American corporations since the regulatory, justice, and political systems have become corrupted. If you have the money you can buy yourself out of serious trouble unless you messed with other more powerful oligarchs.

  16. madopal

    Just being pedantic, but it’s “bury the lede” not “bury the lead”.

    Keep up the good work, Yves. I personally think there’s a whole lot more to this story.

      1. jurisV

        Sorry about that! A quick glance was not enough — my apology to you for my my apparent dyslexia or ? !!

  17. Hugh

    The banks have been allowed, even encouraged to cook their books. Looks like Walmart is doing the same. As others have noted, as Walmart is a business leader, many other US corps are likely engaged in similar frauds.

    1. Capo Regime

      +10. Yes there should be some light shed on the “for profit” “universities”. Accounting practices would be the least of it, fleecing low information, low income students even with honest accounting is a massive and monstrous scam.

      1. jrs

        Other universities do it as well. They often offer a better education the the “for profits” but they make promises on future employment prospects they know aren’t accurate. About the only universities that don’t do it are those that are already insanely overcrowded (some state universities) and that’s because they don’t need to. Yea “for profit” universities might be sleazy but I still think they are a symptom of frankly a system that has promised people jobs and broad based prosperity that just don’t exist.

  18. Mannwich

    Do we really think that a large majority of publicly-traded companies are NOT manipulating their books in SOME fashion or another at this point? I mean, nobody gets prosecuted anymore for blatant fraud, if you’re one of the big players, so why would we think that accounting fraud isn’t front and center happening here all the time now?

  19. evil is evil

    I worked as accounting temp with a growing corporation. I had an enormous number of unentered invoices.

    Until the full purchase order was filled, policy was to not enter the invoice. Some had items worth a couple of cents that had not been delivered, but had tens of thousands of dollars of delivered items not entered as accounts payable.

    Then I went to the public library to find the corporation’s previous year’s public reports.

    The total of received but unentered accounts payable on my desk were more than the entire corporation’s reported net worth. Hidden debt is still debt.

    Checking “just in time” delivery against accounts payable could be the straw that breaks WalMart’s monopolies.

    1. Yalt

      Question: were the assets purchased and already delivered showing on their books as assets, or were those entries also delayed?

      If they were, this looks like an attempt to massage earnings and net worth by mistiming entry of the asset and corresponding liability.

      If not, it looks more like they had a cash flow problem and were looking for any way to delay payment for goods received.

  20. Susan the other

    The smell of blood. Walmart is a just-in-time inventory retailer. They are bleeding themselves. All we need to do to kill them is give them a tiny push. Cut back on anything and everything you buy from them by at least 20%. Not only will this kill them, it will kill them slowly and mercilessly. We are the cat and they are the mouse.

    1. RepubAnon

      The other thing worth noting is that the harm caused by “shrinkage” is directly affected by the business’ profit margin. If you’ve got a 25% margin, every one dollar in shrinkage is like losing four dollars in sales. At a 5% margin, it takes twenty dollars in sales to make up that same one dollar loss.

      WalMart’s big claim to fame is the low margins of profit throughout their supply chain, and offering low prices to consumers. This implies low profit margins at the store level – meaning that they’d have plenty of motivation throughout the entire organization to avoid reporting shrinkage.

      On a side note – I’m starting to see fake stocking at supermarkets: the shelves LOOK full, but only because they move one of each item to the front of the shelf while leaving the spaces behind empty. Lazy stock clerks, or hiding insufficient stock levels? You make the call.

      1. Lambert Strether

        Where are you located? A friend of mine noted the same thing in MI a few years ago. Like a gradually receding tide. Things that used to be available all month running out in the third week. Then the second.

  21. Dave of Maryland

    Is one of the biggest employers in the country about to go bust, yes or no? If yes, how can the nation best prepare itself?

    Are they about to be followed by bunches of other soon-to-fail big box dinosaurs, yes or no?

  22. Otishertz

    If inventory levels in ordering system are inflated then items would not get restocked when sold out. $500k in unacknowledgedm shrinkage annually will produce holes in the shelves. I think the mystery of the empty shelves is solved.

  23. pws

    I had an uncle from Czechoslovakia. He used to say that farmers used to do the same kind of stuff in their centrally planned farming system.

    1. Jack Parsons

      China is wrecking its fish stocks, well not really. The fishermen pull 500, the mayor says it was 1000, the district subcommissioner says 2000, the provincial food&game commisionner says 5000, and the national government says “10,000 fish! Our fishing industry is very productive!”.

  24. TomDor

    If ya purchase 100 of something, but back door the agreement to deliver 80 and get it onto the stock shelf without checking the origional order against the delivered (don’t count it, just stock it and let the computer show the ordered amount)….heck, ya get proceeds from twenty items not produced and not delivered to split between manufacturer and inventory manager(s). This would result in empty shelves or shrinkage, increased profit for manufacturer and under-table bonuses (fraudulent enrichment) for certain managers. It does not mean the lowly employee is stealing to make ends meet. It is usually the case of higher-ups doing the scam.
    The security at WalMart is very high when it comes to their own employees – big brother is WalMart…stealing by employees or customers…not going to happen.
    The scam is up higher in the ranks…apparently above a certain area domain or regional managers.
    Skim Skim Skim

    1. McMike

      Agreed. There is no way WM is letting employees and customers get out with more than a handful of candy bars.

      I say that… but in fact security seems pretty lax to me.

      There are the usual alarm thingies, but I wonder if they are even turned on. There’s little or no uniformed or surveilance security presence to speak of. The clientele and staff are, shall we say, motivated to enhance their take-home pay. And it is not like some aisle stocking clerk is going to chase you down and tackle you for boosting a can of shaving cream.

      There is an 80 year old greeter at the door (watch her, she’s a tough old bat).

      Hmm.

      On a related note, I wonder where WM actually makes it’s margin. Groceries, pharmacy, elecronics, cheap plastic crap?

    2. john c. halasz

      Walmart has a 70% annual employee turn-over rate. It’s part of their “business model”.

    1. Jesus whisperin in your ear

      Cmon, guys, compare the Qui Tam award to your miserable shit Wal-Mart slave wage and think of how those pricks pushed you around all those years. You can drive to Wal-mart with your Bentley and go shopping for a cake with a file in it, to send to Christy Walton. Wouldn’t that be great.

  25. john c. halasz

    I did a write-up on Walmart for my local “Occupy” group. The bottom line: Walmart uses its monopsony power to squeeze low prices out of its suppliers, thus gaining a relentless price advantage in the otherwise highly competitive, low-margin retail sector. But since margins are so low and potential competition so fierce, it must largely pass on those cost reductions to customers. So it can realize its implicit oligopoly rents only through relentless expansion, which revenue expansion shows up speculatively in its stock market price. If it stops expanding, what then? Given their current U.S. market saturation, a certain desperation must ensue, though it seems their most recent market expansion has been occurring in Canada.

    Here in VT a Walmart superstore has been approved and is under construction in St. Albans, 15 miles south of the Canada border and approval has been given for a superstore in Derby, 5 miles south of the border to be constructed next year. Given that there is already a superstore 30 miles south of St. Albans and VT is a low population density rural state, the conjecture is that they are aiming to attract southern Quebec customers, especially given the now high value of the Loonie.

    But both stores are being built by the same local developer with a lease-back arrangement. Given that he’s probably not an idiot, he must have some pretty strong contractual guarantees, to shoulder the financing and tax burdens. But what’s in it for Walmart, since long-run they must build in the contractor’s profit margins, and thus pay a higher overall price? Now corporate leasing of equipment is fairly common, as with e.g. airlines leasing airplanes rather than owning them outright. Other than considerations of flexibility, the point seems to be tax savings, such that the extra margins for the financiers are outweighed by the tax reductions. (Which, of course, implies an economic inefficiency in the tax code at public expense).

    However, I’m not sure that this is the case with Walmart. And given that they operate at low margins anyway, (3.6% net profit over gross revenues last year, which might even be relatively high for retail firms), why would they forgo the extra profit margin from owning their own real estate?

    My conjecture is that by assuming an extra liability without a corresponding asset, even though they are forgoing some small net profit long-run, since assets – liabilities = equity, they are shrinking their equity on the balance sheet and thereby boosting their reported return-on-equity, which is a prime determinant of their stock price. Any analyst who would take the effort to drill down granularly could uncover the ruse, but they’re counting on the expectation that most analysts, let alone stock market “investors” won’t bother, since all that matters is their capital gains, eh?

  26. cwaltz

    Walmart had a third party that did “inventory” every year when I was there from 2000-2003(during the summer months you’d see little slips of paper everywhere and notes to DNI). Employee and management bonuses were based on shrinkage. If there is indeed some inventory shenanigans going on though unless something has changed there’d have to be more than one company involved.

  27. Bet Mulligan

    I started noticing at my local Walomart about a year ago that grocery items were being stocked in very strange places. I remembered thinking, why do they have snack foods stocked by the pots and pans or crackers and other grocery items in the laundry basket aisle when those things are also in the grocery section? It’s not like they’ve added new products and have run out of room in the food section. It started slowly but now it’s wide spread and comical. And this after Walmart complained that customers were only buying food at their stores and then going to Target to buy high margin clothing, etc.

    I guess having inventory shortages would make shelf-filling by any means necessary an imperative, no matter how rediculous it looks.

  28. Gabe

    Wal-mart has had a lot of critics in the past and this definitely does not help their image. This is the perfect case for a forensic accountant, they may be the only ones able to get to the bottom of it.

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