Risk & Compliance

Stein Mart Faulted for Inventory Accounting

The retailer has settled SEC charges its internal accounting controls failed to ensure proper inventory valuations of items subject to price markdo...
Matthew HellerSeptember 23, 2015

Stein Mart has agreed to pay $800,000 to settle charges that it misstated its pre-tax income as a result of improperly valuing inventory that was subject to price discounts.

According to the U.S. Securities and Exchange Commission, the Florida-based retailer often offered merchandise to customers at retail price reductions known as Perm POS markdowns. But from at least 2010 to November 2012, it reduced the value of inventory subject to the markdowns at the time the item was sold rather than immediately at the time the markdown was applied.

The improper valuations resulted in material misstatements of Stein Mart’s pre-tax income in regulatory filings, including an overstatement of almost 30% in the first quarter of 2012, the SEC alleged in an administrative order filed Tuesday.

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Stein Mart will pay an $800,000 penalty to settle the charges.

“Inventory is one of the most significant assets for retail companies, and as a result, it is critical that companies have effective internal accounting controls to ensure that inventory is valued properly,” Michael Maloney, chief accountant of the SEC’s Enforcement Division, said in a news release. “Stein Mart failed in this regard as its internal accounting controls to ensure proper inventory valuations were inadequate in various ways.”

Until at least the middle of 2011, the SEC said, the decision to characterize a markdown as Perm POS rested solely with Stein Mart’s merchandising department, which did not understand the impact that the markdowns could have on inventory valuation accounting.

The retailer’s other discounts included temporary and permanent markdowns. “Despite the fact that the price associated with merchandise subject to Perm POS markdowns never reverted back to its original retail price, Stein Mart accounted for this merchandise in the same manner as it did merchandise subject to temporary markdowns,” the SEC said.

The regulator said Stein Mart CFO Gregory Kleffner, who was hired in 2009, did not learn of its treatment of Perm POS markdowns until the summer of 2011. “After consulting with others, the CFO concluded that Stein Mart’s Perm POS accounting was acceptable” under GAAP, the SEC said.