Kmart Case Study

To illustrate Kmart's scandal, the CRIME model brought up by Rezaee (2002) will be applied. CRIME is the abbreviation for cooks, recipes, incentives, monitoring and end-results, each separately presents one interactive factors in scandal. Cooks are those who are directly liable for the scandal; Recipes represent the way of accounting manipulations; Incentives mean the most common motivations for recipes; Monitoring refers to how and why cooks and recipes are not detected; End-results are the consequences and costs of the scandal (Rezaee, 2002).

To start with, main cooks in Kmart scandal were Kmart's former Chief Executive Officer (CEO), former Chief Financial Officers (CFO), and senior managers, which will be described in detail in the corporate governance part. The recipes were earnings manipulation and inventory misstatement. This relates to incentives of scandal, which are personal compensation, needs to meet Wall Street analyst's expectation, and demand to cover up the inventory and liquidity problem. Monitoring in this scandal refers to failure of sufficient corporate governance and failure of external auditor PricewaterhouseCoopers LLP (PwC). The failure of corporate governance results from dominant managing style, defective compensation scheme and passive board of directors. Referring to the end-result of the whole sandal, Kmart's stock price collapsed form $38 per share as the highest to $1.74 per share, and S&P declined the rating on Kmart bond to junk status (reference). In addition, former CEO and CFO of Kmart were charged guilty by SEC. The former CEO Charles C. Conaway is sued of misleading the investors and misconducting. Kmart as the world top 100 company and leading company in retail market claimed bankruptcy after the scandal.