The Securities and Exchange Commission has charged the Jacksonville, Fla.-based retail chain Stein Mart Inc. with materially misstating its pre-tax income due to improper valuation of inventory subject to price discounts and for having inadequate internal accounting controls.

An SEC investigation found the retailer often offered its merchandise to customers at retail price reductions referred to as Perm POS markdowns and that merchandise subject to such a markdown never reverted back to its original retail price. Stein Mart reduced the value of inventory subject to these markdowns at the time the item was sold rather than immediately at the time the markdown was applied.

As a result, according to the SEC, Stein Mart materially misstated its pre-tax income in certain quarterly public filings with the SEC, including an overstatement of almost 30 percent in the first quarter of 2012.
Stein Mart agreed to settle the SEC’s charges by paying an $800,000 penalty.

“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,” said Michael Maloney, chief accountant of the SEC’s Enforcement Division, in a statement. “Stein Mart failed in this regard as its internal accounting controls to ensure proper inventory valuations were inadequate in various ways.”

According to the SEC’s order instituting a settled administrative proceeding, Stein Mart’s internal accounting controls over Perm POS markdowns were inadequate. For example, until at least the middle of 2011, the retailer’s decision to characterize a markdown as Perm POS resided solely with Stein Mart’s merchandising department, which did not understand the impact that Stein Mart’s markdowns could have on inventory valuation accounting, according to the SEC.

As a reflection of the company’s inadequate internal accounting controls surrounding Perm POS markdowns, Stein Mart’s chief financial officer, who was hired in 2009, did not learn of Stein Mart’s 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 U.S. GAAP.

In the fall of 2012, Stein Mart raised its accounting treatment of Perm POS markdowns with its external auditor and the external auditor informed Stein Mart that its accounting for Perm POS markdowns was not acceptable under GAAP. In May 2013, Stein Mart restated its financial results for the first quarter of 2012, all reporting periods in fiscal year 2011, and its annual reporting period in fiscal year 2010. According to the SEC’s order, Stein Mart also had inadequate internal accounting controls in the areas of software assets, credit card liabilities, and other inventory-related issues.

In agreeing to settle the charges without admitting or denying the SEC’s findings, Stein Mart consented to the SEC’s order imposing an $800,000 penalty and requiring the company to cease and desist from committing or causing any violations or any future violations of the reporting, books and records, and internal controls provisions of the federal securities laws.

Stein Mart said it had previously established a reserve for the potential settlement of the matter and will not require significant adjustment in the third quarter of 2015. “The SEC did not allege fraud by the company and did not bring charges against any individual,” Stein Mart said in a news release. “In connection with the settlement, the SEC considered remedial acts undertaken by the company, including its enhancement of internal controls, retention of additional accounting personnel, and the company's cooperation with the SEC staff during the course of the investigation.”

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