Tuesday, May 10, 2005
Saks Inc. announced the results of a previously disclosed internal investigation into accounting for vendor allowances for marked down inventory, and has fired three executives from its Saks Fifth Avenue division (I resisted using the term "Sacked" in the title, just barely). Saks had conducted an internal investigation in 2002 into the same issues, and apparently the problem has continued. According to a company press release (here):
The Audit Committee's investigation concluded that during the Company's 1999-2003 fiscal years, the total markdown allowances improperly collected from vendors was approximately $20 million. Amounts of markdown allowances improperly collected during this period were previously disclosed in the Company's press release dated March 3, 2005. No improper collections during the 2004 fiscal year were identified. Now that the Audit Committee's investigation is completed, management is undertaking its work to confirm the amount of total vendor markdown allowances determined to have been improperly collected and to determine if any markdown allowances were improperly collected before fiscal 1999. As previously disclosed, the Company intends to reimburse or otherwise compensate the affected vendors for any improper allowances.
The terminated executives are Donald Watros, former COO of Saks Fifth Avenue, Brian Martin, former general counsel for the company during the 2002 internal investigation and then a senior executive with the retail division, and Donald Wright, Saks' Chief Accounting Officer. Brian Martin's brother, Brad, is CEO of Saks, so you know this can't have been an easy decision. The internal investigation also criticized senior Saks management for the "quality of communication" and monitoring of the vendor allowances, and bonuses will be withheld -- at least for this year.
The company will have to restate its earnings for the relevant period, and has not filed its annual report yet for the past fiscal year. The cascade of suits should commence shortly, with the SEC, stock purchasers, and shareholders all jumping into the fray. Perhaps more ominously for the individuals, Saks also disclosed that the U.S. Attorney for the Southern District of New York has made an "inquiry" about the matter -- look for the launch of grand jury subpoenas very soon, if they haven't gone out already. (ph)