Senior Wickes management was aware of bogus profits 6 months before disclosure

Wickes' senior management were aware of accounting irregularities at the group's DIY business at least six months before they made the problems public, it emerged yesterday. The admission is contained in a letter sent to Wickes shareholders yesterday by the new chairman, Michael von Brentano. The letter attempts to detail how the accounting difficulties arose and who was responsible.

It states: "Instances came to light in 1995 in Wickes' businesses in the UK and on the Continent of rebates and contributions being booked as profit in the group's accounts earlier than was justified. The board believes that senior management and the auditors [Arthur Andersen] should have reacted more effectively to these warning signals."

Wickes did not make a public disclosure about the problems until June this year, when it admitted that its profits might have been overstated due to the incorrect accounting of supplier rebates and contributions. Henry Sweetbaum resigned as chairman the following day.

The company has not revealed what these "instances" were. However, it admits that they included the poorly performing Hunter Timber business, which was sold in September 1995. The company says it became aware of "inconsistencies" in the accounting methods during that year.

The company declined to elaborate further, and denied suggestions that Hunter's suppliers demanded the return of their rebates and contributions when the business was sold in 1995.

Management's failure to disclose the problems earlier is just one of a series of criticisms included in the damning report, which was delayed for more than two weeks due to legal difficulties.

The report confirms a systematic attempt to conceal the accounting scam that centred on the buying department. It concluded that there was "serious mismanagement", "deliberate misrepresentation" and "uncommercial arrangements". It said profits were overstated by pounds 51m between 1992-96 at Wickes Building Supplies, the group's main DIY retailing subsidiary.

Some of the activities, such as the misleading of the auditors, are contrary to criminal law. However, the Serious Fraud Office says it is not yet investigating the Wickes affair. The DTI also says that it has not moved to ban any of the Wickes management from acting as a director. Wickes is reserving the right to take action against its auditors, Arthur Andersen.

The six-page document says immediate responsibility for the problems lay with former chairman, Mr Sweetbaum, who had "ultimate responsibility for the group's policies on rebates and contributions". It continues: "He must therefore accept responsibility for what occurred in the buying department, which he has done, and for the failure of the group's senior management to implement controls to prevent it from occurring."

Mr Sweetbaum, who denies any knowledge of the irregularities, is to pay back pounds 720,000 net of tax. This represent two thirds of the payments he received under the group's long-term incentive plan. He is waiving any right to future payments under the scheme, which could have amounted to pounds 885,000. He is also waiving any claim for compensation for loss of office. The company has agreed to take no action against him. He retains his pension, which has a capital value of pounds 2.9m.

Trefor Llewellyn, the former finance director, now at Caradon, who also denied knowledge of the problems, will repay pounds 485,000 of his long-term bonus payments. The company has agreed to make no claim against him. Mr Llewellyn was succeeded as finance director by Stuart Stradling in August 1995. Mr Stradling resigned earlier this month.

Michael Corner has stepped down as group administration director and resigned from the board. He is not repaying any of the pounds 600,000 he received in annual bonus and long-term incentive plan payments last year. He will be retained as a consultant and no claim will be made against him.

Les Rosenthal and UK commercial director Chris Miles, who resigned from the group earlier this year, will not receive any payment for loss of office. The company is reserving the right to take further action against them. Disciplinary proceedings involving further middle-ranking executives and more junior employees will be implemented in due course.

The report states that profits at Wickes Building Suppliers were overstated by pounds 16m in 1995, pounds 14m in 1994 and pounds 11m in the years before that. This related to the incorrect booking of supplier rebates which were often linked to "unrealistic volume targets". The report says some supplier arrangements were uncommercial and were "solely designed to generate rebates and contributions in one year at the expense of later years".

Group shareholder funds will be reduced by pounds 2m due to similar rebate issues in continental Europe. A further pounds 10m provision will be made to cover the group's exposure to property leases relating to Builders Mate and Hunter Timber.

The report reveals that Wickes operated at a loss in the first nine months of this year, a result of correctly accounting for supply contributions.

Comment, page 23