The Adidas Group provided an update on the situation at Reebok India last week, paired with substantial details on the investigation into alleged irregularities at the company, which led to the sacking of its former managing director and chief operating officer last April.
Herbert Hainer, the group's chief executive, said with unusual German irony that the investigation had “brought to light a high level of criminal energy” and collusion between former employees and external business partners.
The company's annual report goes on to detail the findings of its internal investigations: It alleges that the issues at Reebok India included inappropriate recognition of sales, a failure to book sales returns, and a failure to correctly post credit notes to accounts receivable.
As described by Robin Stalker, the Adidas Group's chief financial officer, this resulted in a significant overstatement of net sales and accounts receivable as well as materially incorrect accounting for inventories and provisions. Stalker said that the new management also discovered four warehouses not disclosed in the official accounting records. They were allegedly used to stash products that had supposedly been sold. The findings of the investigations suggested that the practice of inflating sales and profits had been going on for several years, Stalker added.
Based on these findings, the company has restated its accounts for 2011 as described above. The group confirmed that the alleged irregularities had led to a decline of €70 million in its operating profit at Reebok India – representing the gap between the initial expectations for its profit and the actual results. This gap was caused by restructuring costs and the closure of stores as well as diminished sales. Only a small part of that could be recuperated this year.
Meanwhile, Subhinder Singh, the former managing director of Reebok India, is still held in custody about five months after his arrest. His bail was denied in court a few weeks ago and his lawyer is preparing to apply for bail to a higher court.
The former managing director, who was hailed until last year as a success story for Reebok and the Adidas Group, is firmly rejecting the accusations that are leveled at him. His lawyer claimed that the charge sheet did not contain any facts backing up accusations of profiteering, and that Singh had cleared up any queries from the investigators regarding transit of goods and money at Reebok India, as well as queries relating to his private affairs.
The accused party claims that the accounts at Reebok India were manipulated by other executives, some of whom are still prominently employed at the group, as a means to reach targets and to earn their bonuses. They said that Singh had been sacked because he was putting pressure on those who compiled the allegedly falsified accounts, in order to get them rectified.