Securities Law Prof Blog

Editor: Eric C. Chaffee
Univ. of Toledo College of Law

Wednesday, September 5, 2007

Saks Settles Accounting Charges

On September  5,  the  SECfiled  a  civil  injunctive  action charging Saks Incorporated, owner  of  luxury  department  store  Saks Fifth Avenue among other retail chains, with violating  the  financial reporting, books-and-records, and internal control provisions  of  theSecurities Exchange Act of 1934. Saks has agreed to settle  the  case,without admitting or denying the  Commission's  allegations,  and  has agreed to an injunction barring future violations of these provisions.  The Commission's complaint,  filed  in  federal  court  in  Manhattan, alleges that from the mid-1990s until 2003, certain employees  of  the company's Saks Fifth Avenue Enterprises division (SFAE) engaged in two deceptive practices in order to achieve their  financial  targets  for the month, quarter or retail season and that these practices  resulted in the company's overstatement of income by material  amounts  in  its financial statements for its 2000, 2001, and 2002 fiscal years and for two quarters in fiscal 2001 and 1999. According to the complaint,  the improper accounting by Saks resulted from aggressive financial targets the company set for SFAE, the belief by some  SFAE  buyers  that  they were  expected  to  achieve  their  targets  by  deceptive  means,  if necessary, and Saks' lack of adequate internal controls.  The deceptive practices consisted of the  intentional  over-collection of vendor allowance, or VA, and the improper deferral -- or rolling -- of markdowns of goods whose value was impaired. As  a  result  of  the vendor allowance over-collection, Saks overstated its net  income  for the fiscal year ended Feb. 3, 2001 by 7.0%; overstated its net  income for the fiscal year ended Feb. 2, 2002 by 32.3%;  overstated  its  net income for fiscal year ended Feb. 1, 2003 by 42.6%; and overstated its net income by 3.6% for the fiscal year  ended  Jan.  31,  2004.  As  a result of the markdown rolling, Saks overstated its net income in  the second quarter of fiscal year 1999 by 86.5%; and understated its  loss in the second quarter of fiscal year 2001 by 10.4%.

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