8Ed.sol2.5 - CASE 2.5 DOLLAR GENERAL STORES, INC. Synopsis...

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CASE 2.5 DOLLAR GENERAL STORES, INC. Synopsis In 1999, Dollar General Stores turned to IBM for help in upgrading its information technology infrastructure. The key recommendation that IBM made was for Dollar General to replace the archaic sales registers used in the thousands of retail stores owned and operated by the large retailer. As a result of that recommendation, Dollar General’s management decided to replace those sales registers with new, state-of-the-art sales registers made by IBM. Initially, Dollar General’s management planned to phase in the new IBM sales registers over a several year period. However, an IBM salesperson insisted that Dollar General should purchase and install the new sales registers by the end of 2000. In response, Dollar General’s top executives explained that they also believed that the new sales registers should be installed more rapidly but an “accounting problem” prevented them from doing so. This accounting problem was the large “book loss” that Dollar General would be required to record in 2000 if the old sales registers were replaced en masse. Since the old sales registers had no salvage value, Dollar General would be forced to record a loss equal to their remaining book value of approximately $10 million. To solve Dollar General’s “accounting problem” and thereby “seal” the large transaction for IBM, the IBM salesperson devised a sham transaction. IBM would agree to purchase the worthless sales registers of Dollar General for an amount equal to their book value. In exchange, the purchase price of the new sales registers would be increased by the amount that IBM paid for the old sales registers. A subsequent SEC investigation uncovered the sham transaction between Dollar General and IBM. In 2007, the SEC imposed multimillion dollar fines on both Dollar General and IBM. In addition, the IBM manager who was instrumental in structuring the sham transaction was sanctioned by the SEC. 115 Dollar General Stores, Inc.—Key Facts 1. In 1999, Dollar General retained IBM to revamp its outdated technology infrastructure.
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116 Case 2.5 Dollar General Stores, Inc. 2. IBM recommended that Dollar General replace its antiquated sales registers with state-of- the-art IBM sales registers. 3. Dollar General’s management agreed to purchase the IBM sales registers over a several year period. 4. Dollar General’s management did not want to purchase all of the new sales registers immediately because doing so would force the company to recognize a large loss on the disposal of the old sales registers that had no salvage value. 5.
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This note was uploaded on 09/15/2011 for the course ACT 442 taught by Professor Nancy during the Spring '11 term at Ohio State.

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8Ed.sol2.5 - CASE 2.5 DOLLAR GENERAL STORES, INC. Synopsis...

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