Saks Settles SEC Vendor-Allowance Suit

The commission also alleged that Saks employees improperly deferred permanent markdowns from one period to another.
Stephen TaubSeptember 5, 2007

Saks Inc. has settled Securities and Exchange Commission charges that some of the retailer’s employees practiced deception in order to meet the retailer’s “aggressive” earnings targets.

From the mid-1990s until 2003, employees of the department store operator’s Saks Fifth Avenue Enterprises division allegedly understated the sales performance of suppliers’ goods and deferred permanent markdowns from one period to another. The result: an overstatement of earnings from 2000 through 2002 and for two quarters in 2001 and 1999, according to the commission.

The SEC asserted that the improper accounting resulted from Saks’s aggressive financial targets for the division; the belief by some SFAE buyers that they were expected to achieve their targets by deceptive means if they needed to; and the parent company’s lack of adequate internal controls.

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Without admitting or denying the SEC’s allegations, Saks—which will not have to pay a fine—agreed not to violate the reporting, books-and-records, and internal controls provisions of the securities laws.

The SEC had charged SFAE buyers intentionally understated to vendors the sales performance of vendors’ merchandise. Based on that misinformation, SFAE collected from the vendors millions of dollars in “vendor allowance” payments to which the company wasn’t entitled, according to the commission.

Under its vendor-allowance method, Saks and a vendor shared
the risk that the vendor’s goods wouldn’t sell at full price. That helped Saks hit particular minimum profit margins from its sale of the vendor’s merchandise, according to the complaint. “The more Saks had to mark down the vendor’s merchandise in order for it to sell, the more the vendor was expected to compensate Saks in additional vendor allowance,” the commission explained.

The SEC alleged that more than one dozen employees took part in the practice, which continued from 1996 until 2003. Saks was accused of overstating net income by 7 percent for the fiscal year ended February 3, 2001; by 32.3 percent for fiscal 2002; 42.6 percent for fiscal 2003; and 3.6 percent for fiscal 2004.

Besides the vendor-allowance allegations, the SEC charged that Saks workers improperly deferred permanent markdowns from one period to another. Saks used the markdowns as a way of recognizing that inventory on the sales floor couldn’t sell at the existing retail price, according to the complaint.

The permanent markdowns cut the value of all inventory subject to the markdown on Saks’ balance sheet and boosted 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 complaint noted.

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