Thursday, September 6, 2007
High end retailer Saks Inc. settled an SEC accounting reporting and books-and-records complaint (here) by agreeing to a permanent injunction, but it will not have to pay a civil penalty for the accounting irregularities. The problems occurred from the mid-1990s until 2003 at its Saks Fifth Avenue division, and involved improper accounting for vendor allowances and deferrals of product markdowns to pump up income. According to the SEC Litigation release (here):
One of the practices involved the intentional understatement, by the SFAE [Saks Fifth Avenue Enterprises] buyers to vendors, of the sales performance of the vendors' merchandise. Based on that misinformation, SFAE collected from the vendors millions of dollars in "vendor allowance" payments to which the Company was not entitled. Over a dozen SFAE employees participated in the vendor allowance over-collection practice, which continued for at least eight years, from 1996 until 2003.
The second deceptive practice involved the improper deferral (or "rolling") of permanent markdowns from one period to another at SFAE. Permanent markdowns were the means by which Saks recognized that inventory on the sales floor could not sell at the existing retail price, i.e., was impaired. The effect of a permanent markdown on Saks' financial statements was to reduce the value of all inventory subject to the markdown on Saks' balance sheet and also to increase its expense for cost of goods sold, thus reducing the net income reflected on the Company's income statement. Thus the improper rolling of markdowns resulted in Saks' overstatement of its inventory and net income in some reporting periods from which permanent markdowns were deferred.
The decision not to impose a monetary penalty against Saks is part of a continuing trend in which companies are allowed to settle SEC actions involving accounting with no additional financial consequences to the company when the harm from the misconduct has already hit investors with a decline in the stock price. (ph)