Stein Mart 2012 Annual Report Download - page 24

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inventory method of accounting, the characterization of markdowns as either permanent or promotional has a direct impact on the
calculation of ending inventory value and thus cost of merchandise sold. More specifically, inventory is reduced by permanent markdowns
for all on-hand units at the time the markdown is taken but is not reduced by promotional markdowns until the units are sold. These
material weaknesses resulted in the misstatement of our Inventory and Cost of merchandise sold.
Leasehold improvement costs: We did not maintain effective internal controls over leasehold improvements that impacted the presentation
and disclosure and accuracy of the accounting for and disclosures of Prepaid expenses and other current assets, Property and equipment,
net, Other assets, Other liabilities, Cost of merchandise sold and Selling, general & administrative expenses. Specifically, we did not
design effective controls for financial management to adequately validate the assertions made by real estate operations management
regarding the future value of leasehold improvements made by the Company and consequently did not record tenant improvement
allowances (“TIA”) provided by landlords for our stores in accordance with accounting standards. TIA provided as leasehold incentives to
us was thus improperly netted against property and equipment instead of being accounted for as a deferred rent credit. This material
weakness resulted in the misstatement of our Prepaid expenses and other current assets, Property and equipment, net, Other assets,
Other liabilities, Cost of merchandise sold and Selling, general & administrative expenses.
Compensated absences (paid vacation): We did not maintain effective internal controls over the establishment of compensated absences
(paid vacation) accruals that impacted accuracy, completeness and valuation of the accounting for and disclosures of Accrued expenses
and other current liabilities and Selling, general and administrative expenses. Specifically, we did not design effective controls for financial
management to effectively communicate with human resources personnel to fully understand the Company’s vacation policy. The
Company’s vacation policy is an “earn in one year, take in the next” policy whereby at the end of any year, the policy leaves associates
with a full year of earned, but untaken vacation. In the past, the policy was incorrectly interpreted by financial management to be an “earn
and take in the same year” policy; thus the Company has historically not recorded a vacation accrual. This material weakness resulted in
the misstatement of our Accrued expenses and other current liabilities and Selling, general and administrative expenses.
Indirect overhead cost capitalization: We did not maintain effective internal controls over indirect overhead cost capitalization that
impacted the valuation and accuracy of the accounting for and disclosures of Inventory and Cost of merchandise sold. Specifically, we did
not design effective controls to calculate the indirect cost capitalization adjustment in interim periods. Although we have a control in place
to evaluate the key assumptions and the resulting calculation of the indirect cost capitalization adjustment on an annual basis, we did not
conduct an analysis at interim period ends. This material weakness resulted in the misstatement of our Inventory and Cost of merchandise
sold in interim periods.
Software assets amortization periods and retirements: We did not maintain effective internal controls over the appropriate amortization
periods and the timing of retirements of software assets that impact the accuracy, completeness, presentation and disclosure of the
accounting for and disclosures of Prepaid expenses and other current assets, Property and equipment, net, and Selling, general and
administrative expenses. Specifically, we did not design effective controls for information technology personnel to effectively communicate
the nature of certain software expenditures to the finance department resulting in the amortization of software costs over an improper
period. Additionally, we did not design effective controls for financial management to effectively communicate with information technology
personnel to timely identify and remove retired software assets from the accounting records. These material weaknesses resulted in the
misstatement of our Prepaid expenses and other current assets, Property and equipment, net, and Selling, general and administrative
expenses.
The material weaknesses set forth above have caused us to conclude that we had a material weakness in our control environment related
to the level of information and communication between the finance department and other departmental functions being insufficient in
preventing and detecting material misstatements to the Company's financial statements. This material weakness contributed to the above
material weaknesses.
The following additional material weakness was identified in the third quarter of 2011 and still existed as of February 2, 2013:
Information technology communication: We did not maintain effective internal controls over information technology communication that
impacted the accuracy and valuation of the accounting for and disclosures of cost of merchandise sold and inventory. Specifically, we did
not design effective controls for our IT department to effectively communicate system incidents to the appropriate personnel. We
determined that IT operations personnel followed protocols for issue resolution; however, because of the uniqueness and potential impacts
of certain incidents, further escalation to the finance organization should have occurred. IT personnel did not notify the finance
organization that historical records had been removed to free up system capacity and that certain transactions had been reprocessed.
This prevented accounting personnel from identifying an error in the Perpetual System unit balances and analyzing the potential impact
related to permanent markdowns on a timely basis. This material weakness resulted in an adjustment in the third quarter of 2011 to cost of
merchandise sold and inventory by not recording all permanent markdowns actually taken.