Accounting Practices at Wal-Mart

Total words: 1850

Wal-Mart Stores, Inc. is the world's largest retailer, with $244.5 billion in sales in the fiscal year ending Jan. 31, 2003.Some of Wal-Mart Stores, Inc competitors include Target and K-mart stores. The company employs more than 1.3 million associates worldwide through more than 3,200 facilities in the United States and abroad. More than 100 million customers per week visit Wal-Mart stores worldwide. Guided by founder Sam Walton's passion for customer satisfaction and "Every Day Low Prices," Wal-Mart's four retail divisions -- Wal-Mart Supercenters, Discount Stores, Neighborhood Markets and SAM'S CLUB warehouses -- offer a wide variety of quality merchandise to consumers around the world.
Wal-Mart Milestones
·     1962: first Wal-Mart in Rogers, Ark., opens.
·     1969: company incorporated as Wal-Mart Stores, Inc.
·     1970: first distribution center and home office in Bentonville, Ark. open; Wal-Mart goes public on the New York Stock Exchange. 1979: annual sales top $1 billion.
·     1983: SAM'S CLUB warehouse concept introduced.
·     1988: first Supercenter opens.
·     1991: first international unit opens in Mexico City.

By the turn of the century Wal-Mart had been named "Retailer of the Century" by Discount Store News; made FORTUNE magazine's lists of the "Most Admired Companies in America" and the "100 Best Companies To Work For;" and was ranked on Financial Times' "Most Respected in the World" list. In 2002, Wal-Mart became No. 1 on the FORTUNE 500 list and was presented with the Ron Brown Award for Corporate Leadership, a presidential award that recognizes companies for outstanding achievement in employee and community relations. In 2003, Wal- Mart was named FORTUNE magazine's Most Admired Company in America.

Wal-Mart Involvement

Wal-Mart Stores, Inc. empowers its associates to serve the needs of their communities through its Good.Works. initiative. Last year, Wal-Mart Stores, Inc., contributed more than $150 million to support communities and local non-profit organizations. Customers raised an additional $75 million with the help of our stores and clubs.

Wal-Mart International Operations

Wal-Mart became an international company in 1991 when a SAM'S CLUB opened near Mexico City. Just two years later, the Wal-Mart International Division was created to oversee growing opportunities worldwide. Today, customers at more than 1,300 units in nine countries prove that Wal-Mart's Every Day Low Price promise is a message clearly understood in any language. The division currently operates stores and clubs employing more than 300,000 associates in the following countries: Argentina, Brazil, Canada, China, Germany, Japan, Korea, Mexico, Puerto Rico, United Kingdom. Wal-Mart has experienced success internationally because of its ability to transport the company's unique culture and effective retailing concepts to each new country. Associates get involved in the local communities and adapt to local cultures. They respond to customer needs, merchandise preferences and local suppliers. By serving each hometown in its own unique way, Wal-Mart International has realized significant growth with potential for much greater development worldwide. Wal-Mart International has achieved global expansion through a combination of new store construction and acquisitions. This strategy has given the company excellent market penetration and positioned it for future development. The company sees its development throughout North America, Latin America, Asia and Europe as a good beginning with many promising areas for further expansion. The division has posted impressive financial results. Fiscal 2003 sales reached $40.7 billion, a 15 percent increase over the previous year, and operating profit rose to $2.03 billion, an increase of 55.8 percent. This year, Wal-Mart International plans to open 120 to 130 units in existing markets. The announced units include two restaurant formats, specialty apparel retail stores and supermarkets in Mexico.

When Sam Walton founded "Wal-Mart", he established the "Three Basic Beliefs" of which the company declares they stay firmly committed: respect for the individual, service to our customers, strive for excellence. Beliefs as such go hand in hand with the integrity and ethical conduct that should be the foundation of every business. Yet, this is not always so. There are some organizations in existence that are not built upon such a foundation. Some tend to vacillate between ethics and indecency because they follow guidelines only on one end of the spectrum. It can be easy to smile at a customer and work effectively with other associates; but is it just as easy to keep financial statements accurate and honest. Is Wal-Mart Stores, Inc one of those companies or does "Wal-Mart" practices ethically sound accounting principles as outlined in GAAP? Wal-Mart is an industry leader in inventory management and shrinkage control and they use the same accounting method for taxes, financial reporting, and evaluations of daily operations.

Wal-Mart is committed to advancing the long-term interests of its shareholders and to protecting and improving the value of their investment by observing the highest standards of ethical and legal conduct in all business dealings. For both financial reporting and tax purposes, the Wal-Mart uses the accrual method of accounting and maintains a perpetual inventory system. Wal-Mart provides full, fair, accurate, timely and understandable disclosure in the reports and documents it files with the Securities and Exchange Commission, as well as in its other public communications. Wal-Mart also conducts its operations in accordance with accepted principles of good corporate governance and generally accepted accounting principles.

According to Wal-mart's code of ethics they firmly believe in the importance of financial integrity. Wal-Mart requires honest and accurate recording and reporting of financial information in order to make responsible business decisions. All financial books, records and accounts must accurately reflect transactions and events and conform to generally accepted accounting principles and to Wal-Mart's system of internal controls. No Wal-Mart document or record may be falsified for any reason, and no undisclosed or unrecorded accounts of Wal-Mart's funds or assets may be established for any purpose. Wal-Mart has a separate "Code of Ethics for the CEO and Senior Financial Officers" that imposes additional responsibilities on those persons regarding financial integrity. Any amendments or waivers with respect to such code of ethics may only be approved by the Audit Committee of the Board of Directors and will be promptly disclosed to shareholders as required by applicable securities laws.

Wal-Mart outlines several things that need to be remembered regarding financial integrity. First, the company deems it important to watch for financial results that are inconsistent with underlying performance or transactions with no clear business purpose. The process of retaining is also a very important aspect of Wal-Mart's goal of maintaining ethical accounting practices. It is set forth that documents in accordance with applicable laws, regulations or court orders and in compliance with all internal retention policies and directives, as well as, all complaints received regarding accounting, internal audit controls, or auditing matters shall be retained. Just as pertinent, all employees, officers, directors, etc. are instructed not withhold or suppress any information relevant to financial and accounting matters.

Chapter five of our text describes the objectives and elements of internal control; the main theme of internal control is "safeguard". Wal-Mart contends to be alert to any attempts to circumvent the internal controls. Any person or team that is trying to go around the policies and procedures that are meant to protect assets, business information, and regulations should be reported. However, Wal-Mart strongly believes in protocol so, the company has a clear process for handling accounting ethics concerns.

The initial report by an associate is done by means of open door or ethics hotline.
The Open Door is the most direct way to voice any concern to a supervisor. If an employee believes his immediate supervisor is involved in misconduct, he is to report the misconduct to the next level of management believed not to be involved. Wal-Mart has an Ethics Hotline, which allows associates to report a violation on a confidential and anonymous basis. The ethics hotline forwards (and supervisors are encouraged to) report to the Ethics Office; it is then forwarded to the Internal Audit Department. The Internal Audit Department oversees investigation and resolution of ethics report. Internal Audit Department maintains a log of all ethics matters and periodically provides reports to senior management and the Audit Committee. Lastly, feedback is provided to reporting associate where feasible.

With all of Wal-Mart ethical accounting procedures outlined so thoroughly, one would think that the company would never be suspected of dishonest financial reporting. Arguably, Wal-Mart has maintained a sound and scrupulous accounting system. However, in mid-August of 2000 Wal-Mart decided to make a minor accounting change due to some questions that arose within the company. This seemingly minute change had a major effect on stock. After, announcing its second-quarter earnings, Wal-Mart said it planned to revise its accounting practices for consumer layaways. The result was projected as a minor hit to third-quarter earnings of no more than two cents a share. What Wal-Mart said was that it would wait to record sales on layaway items until the consumer paid off the entire balance, not when the sale itself was posted. The change was expected to affect about $400 million in sales, the company said. Wal-Mart took a chance; they pointed out their own indiscretion and went about fixing it. Investors quickly sold off shares: what a huge mistake. The sell off came as Wal-Mart announced a quarterly net gain of 28%. The company did what very few can boast about; they made a change to reflect a more adequate method and were richly rewarded.

Wal-mart Under Fire

In August of 1998 Wal-Mart Stores, Inc. was sued by the Comissioner of Internal Reveunue. Wal-mart had been accounting for unverified inventory shrinkage. The question of the case therefore remained: can a retailer account for unverified inventory shrinkage and if so, was the method used by Wal-Mart permissible. At that time, Wal-Mart Stores, Inc and its subsidiaries utilized an extensive distribution and tracking system to maintain optimal inventories at each store. Wal-Mart's inventory system was commonly revered as the finest in the retail industry. So where did they go wrong? Wal-Mart did not conduct a physical inventory at year-end, because of this its perpetual inventory records did not account for any shrinkage that may have occurred during the period between the date of the last physical inventory and the taxable year-end. The parties refer to this period as the stub period. Left unadjusted, the its book records would overstate income because the stub period shrinkage results in a decrease to ending inventory, thus increasing the cost of goods sold and reducing gross income. Yet, Ernst & Young periodically reviewed the Wal-Mart's accounting method for estimating shrinkage during the stub period and never recommended a change. In fact, they offered opinions that the company's financial statements conformed to Generally Accepted Accounting Principles (GAAP). With that the commissioner of internal revenue disallowed Wal-Mart Stores, Inc and its subsidiaries shrinkage estimates and issued notices of tax deficiency to the company. After Wal-Mart appealed the tax deficiencies, the court found that its method was sound because it clearly reflects income and conforms to the best accounting practice in the retail industry.

References
Slater, Robert. Wal-Mart Decade: How a New Generation of Leaders Turned
Sam Walton's Legacy into the World's #1 Company. Penguin USA 2003

Slater, Robert. LA Cultura De Wal-mart. Santillana Publishing Inc. 2004

Company Information
http://www.walmart.com/cservice/aw_index.gsp

Financial Information
http://investor.walmartstores.com/phoenix.zhtml?c=112761&p=irol-irhome

The Bureau of National Affairs, Inc., Washington D.C.
http://lw.bna.com/lw/19980908/972693.htm

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