Retailer Target has been rocked by an accounting scandal that showed up as artificially inflated earnings in the first half of the financial year.  The management has acted and many heads have rolled, including senior managers, with more employees facing disciplinary action for doing “mind-blowingly stupid.”

According to reports, a section of the Target staff colluded with a few suppliers to book rebates for showing that the chain’s earnings are up. They raised the earnings by almost 40 per cent by assuring higher prices to the suppliers in return for booking extra rebates in the first half of the fiscal.

Thus, rebates were fixed with 31 overseas’ suppliers after promising that prices would be hiked in the second half, reports News Corp.

Among those who resigned included former Target managing director Stuart Machin, who initially feigned ignorance about the supplier arrangements. But he agreed to quit as the lapse had happened under his watch.

Target reported earnings before interest and tax (EBIT) of $74 million for the half that was up from $70 million a year ago. Actually, the EBIT should have been $53 million if not for the inflated $21 million from the rebate arrangements.

But the damage was underplayed by promoter Wesfarmers and the managing director Richard Goyder, who said, only less than 10 people are involved and the motive was to prop up an earnings shortfall.

Wesfarmers group also owns discount retailer Kmart and supermarket chain Coles. 

“What is so disappointing about this is that people have made the decision, probably through an implied pressure, to do something that was mind-blowingly stupid,” he told reporters.

The scandal was confirmed after Wesfarmers and its external auditor Ernst & Young started investigating the irregularities and checked 10,000 emails and quizzed many employees. During the probe, it found that a bunch of 10 staff was involved in a scheme that offered 31 overseas clothing suppliers price rises averaging 4 percent in the June half in return for extra rebates in the December half.

Letters that offered such price rises were concealed from Wesfarmers and its auditors.

The probe also revealed that the rebates were taken to profit, instead of booking them against the cost of inventory as required by the accounting protocols. As a result, it showed up as boosting Target’s December-half earnings by 40 percent at about $21 million, reports The Sydney Morning Herald.

Target is now working with suppliers to unwind the arrangements set up by the errant staff.