Just call them "grossly derelict." That's the description an internal probe has laid on former Kmart CEO Charles Conaway and some members of his executive team.

The investigation was spurred by anonymous letters that alleged, among other things, accounting improprieties. Among the findings filed in federal court Friday:

  • The company hired "unqualified" executives and paid them too much.

  • Management did more than just delay paying vendors when cash got tight; it also abused return policies and lied to the vendors about why they weren't getting paid.

  • The vendor issue -- "Project Slow It Down" -- allowed executives to inflate financial forecasts.

  • The company took $92 million in questionable allowances in 2001.

  • Some executives used corporate aircraft for personal trips and reported them as visits to stores.

  • One executive was responsible for $850 million worth of unapproved inventory purchases, something that "substantially contributed" to Kmart's liquidity crunch.

These findings, if true, make it clear the company's implosion was caused not so much by strong competition from Wal-Mart(NYSE: WMT) and Target(NYSE: TGT) as malfeasance and ineptness from its executive team.

Conaway now faces the possibility the company will take legal action against him. If so, he stands to lose millions in severance pay and forgiven loans.

Don't expect this story to go away soon. The SEC, the FBI, and Congress are also investigating the allegations.