“My clients are starting to get more aggressive in their negotiating stance. They are not willing to be patsies anymore. They are starting to look at ways to minimize their exposure, and some are taking the stance that they don’t mind losing the account because they feel that, at the end of the day, they may lose the account anyway,” Ellinger said.
He believes the Saks Fifth Avenue disclosures are “simply the tip of the iceberg. SFA is very small as a department store organization in the scheme of things, compared with other bigger retailers.” In his view, the audit committees of larger department store chains should be looking at their methods of dealing with chargebacks and ensuring their procedures are in order.
But what began as an internal Saks investigation into vendor markdowns at SFA has since broadened to cover wider issues concerning accounting controls at both SFA and Saks Inc., according to an April 14 Saks Inc. filing with the SEC. In it, Saks says: “Controls over the selection and application of its accounting policies related to leasehold improvements and tenant allowances and purchase discounts received from vendors were, as of Jan. 29, 2005, ineffective to ensure that such transactions were recorded in accordance with accounting principles generally accepted in the U.S.”
Saks also said that, due to the deficient controls, misstatements in property and equipment, deferred rent liabilities, rent expense, depreciation expense, cost of goods sold and inventory were not identified. Dale Bridges, a Saks Inc. controller, and Don Wattrow, a Saks Fifth Avenue executive vice president of administration, have been put on leave. It’s not determined yet if any personnel at Saks Inc. or its SFA division will be charged or fined for any wrongdoings. The SEC won’t provide any details about its investigation.
The deficiencies mean Saks Inc. must restate financial results back to 2002, delay its 2004 10-K report and postpone its annual shareholders meeting until it completes its probe and institutes proper controls. Filing delays puts Saks in violation of certain loan covenants, though Saks is seeking waivers. Without them, the company’s liquidity could be affected and vendors might seek tougher credit terms.