Outdoor recreation retailer Cabela’s has agreed to pay $1 million to settle charges that it improperly included an intercompany promotions fee in its financial statements, resulting in an inflated measurement of profitability.

The U.S. Securities and Exchange Commission said the inclusion of the fee that Cabela’s received from its banking subsidiary, World’s Foremost Bank (WFB), contributed approximately 47% to 100% to a reported year-over-year increase in its merchandise gross margin percentage for the first through third quarters and year-end 2012.

Cabela’s CFO Ralph Castner, who was chairman of World’s Foremost Bank when the accounting errors occurred, personally agreed to pay a $50,000 fine to the SEC.

“Cabela’s did not disclose the material impact of the promotions fee on the metric in its description of the reasons for the year-over-year increase in merchandise gross margin percentage,” the SEC said. “Because of … the lack of disclosure, investors were not aware that an intercompany payment was responsible for a material part of the improvement in the key financial metric.”

The SEC said in an administrative order that Castner did not disclose the contribution of the promotions fee to the gross margin increase because he believed the associated costs incurred by Cabela’s offset its impact.

Cabela’s formed WFB in 2001 and, as part of their relationship, the bank issues and manages Cabela’s credit card, which is its primary customer loyalty rewards program. In 2012, WFB paid Cabela’s about $15.8 million in fees to use the parent company’s intellectual property and trademarks and for the costs of promoting the card.

Under GAAP, intercompany transactions must be eliminated in the preparation of financial statements. But according to the SEC, Cabela’s failed to increase WFB revenue and its own merchandise cost of sales to eliminate the impact of the promotions fee.

The agency said Cabela’s also failed to account properly for several items under GAAP in the third quarter of 2012 that increased net income for that period by about $2 million, or nearly 5%.

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