PepsiCo Units Facing Possible SEC Charges

PepsiCo Inc. said Friday that the Securities and Exchange Commission might bring civil charges against two of the company’s divisions for allegedly assisting in improper accounting by Kmart Holding Corp.

The SEC, which notified PepsiCo of the possible legal action, alleges that employees of the company’s soft-drink and Frito-Lay divisions signed documents acknowledging payments of $5.8 million, which Kmart used to improperly record the timing of revenue. PepsiCo officers weren’t involved in the alleged wrongdoing, and it is cooperating with the probe, the Purchase, N.Y.-based company said.

Kmart said the PepsiCo documents were disclosed to the SEC in an investigation that began after the discounter announced it had found accounting irregularities after filing for bankruptcy protection in January 2002.

The agency also has probed grocery distributors Royal Ahold and Fleming Cos., shoe retailer Just For Feet Inc. and Coca-Cola Co. -- and their suppliers -- to determine whether payments were improperly recorded to inflate profits.

“It’s clear from recent SEC staff comments and public cases that there is no question that SEC enforcement is focusing on vendors who may be contributing causes to financial statement misstatements,” said Jacob Frenkel, a former SEC lawyer who’s a partner at Smith, Gambrell & Russell in Washington.

Kmart said that all employees responsible for improper accounting had been terminated and that financial statements for 2001 and previous years had been restated to correct the errors. The SEC declined to comment.

Recent accounting changes, including the 2002 Sarbanes-Oxley Act, have tightened rules and placed increasing pressure on management to oversee financial transactions, said Richard Hastings, an economist at Bernard Sands, which advises vendors on credit.

The latest allegation regarding Kmart suggests “how easy it was before Sarbanes-Oxley for deals to be altered or modified by middle-management employees on both sides of the transaction,” Hastings said. “There were not that many internal controls.”

PepsiCo shares rose 38 cents to $54.49 on the New York Stock Exchange. Kmart rose 72 cents to $44.63 on Nasdaq.