Dollar General Case Study

I. Facts of the Case

On April 7, 2005, the U.S. Securities and Exchange Commission filed a complaint against Dollar General Corporation and a number of its former upper management employees for participating and facilitating accounting fraud. During the years of 1999 and 2000, the company’s accountants and staff configured that Dollar General should have recognized over $13 million in import freight expenses in fiscal year 1999. General Accepted Accounting Principles requires that in such a case, businesses restate prior periods or recognize the expense in the fiscal year for which the expense was incurred. However, former CFO, Brian Burr, insisted on making a journal entry that did not involve recognizing all of the expenses in 1999. Burr intended to defer the expenses to avoid further undesirable impact on the already determined earnings at year-end. In doing so, employees were able to receive bonuses and the company as a whole, met expectations set previously set by analysts (SEC, 2005). Had the expenses been recognized in the proper period or restated to show the true success of the company, such bonuses would not have been granted and the company would have fell short of their expectations.

The SEC further alleged that Dollar General maintained outdates and worthless inventory on their financial statements but then proceeded to conduct a fictitious sale of $11 million for this inventory. Dollar General had a lease agreement with a vendor (Vendor A for purposes of this report) who agreed to purchase the outdated inventory and write a check for over $11 million by January 31st so that Dollar General could recognize this sale and lease agreement with the fiscal year in which the lease agreement actually had no relation to. The purchase of this inventory and rapid payment was in exchange for a binding lease agreement in that in the future, Dollar General would buy all of their future electronics from Vendor A. This unusual activity, to pay for a lease agreement...