Rite Aid Corp. disclosed yesterday that the Securities and Exchange Commission has begun a formal investigation into the troubled drugstore chain and that its former auditor quit because it could not trust information from management.
In a filing late yesterday with the SEC, the Camp Hill, Pa.-based retailer said it had been been notified of the probe into dealings that forced it to revise its financial statements and slash past profit figures by $500 million. Company officials said they intend to fully cooperate with the investigation but offered no further details.
The company also explained the resignation last week of auditor KPMG International.
KPMG told the drugstore chain and a member of its audit committee on Nov. 11 that it was resigning because it was "unable to continue to rely on management's representations," Rite Aid said in its filing.
A company spokeswoman did not return phone calls yesterday.
Leonard I. Green, who stepped in Monday to replace the ousted Martin L. Grass as chairman, acknowledged in a statement yesterday that the investigation and change in auditors have raised concerns.
"We understand these concerns and we certainly know that this company not only has to substantially improve its performance but also needs to enhance its financial controls and discipline," he said. "We have been working diligently on this front and will intensify our efforts going forward." The company is addressing issues raised in yesterday's 8-K filing, he said.
According to the filing, KPMG said it decided to resign after Rite Aid announced Oct. 18 that it would restate its consolidated balance sheets as of Feb. 27, 1999, and Feb. 28, 1998, and related statements of income, stockholders' equity and cash flows for the past three fiscal years.
Because of that, KPMG said its auditors' report of May 28 "should no longer be relied upon," the filing said.
The auditors disagreed with Rite Aid in three key areas, the filing said. KPMG took issue with Rite Aid's view that certain amounts could be shown as income, based upon estimates of recoveries from vendors. Additionally, KPMG disagreed with Rite Aid's accounting for certain deferred costs and for certain expenses charged against its acquisitions.
Last June, KPMG detailed steps that it said should be taken to improve Rite Aid's financial accounting and reporting, including adding qualified accountants, improving the financial accounting systems that produce the necessary data, analyzing the data on a more timely basis and better documenting transactions, journal entries and business decisions, the company filing said.
KPMG said at that time it could not continue issuing quarterly review reports until those issues were resolved.
Yesterday Rite Aid shares, which have lost 86 percent of their value since January, closed at $6.875, down 0.125 cents.