Stein Mart 2011 Annual Report Download - page 24

Table of Contents
We did not maintain effective controls related to the reconciliations of credit card receivables accounts. Specifically, we determined the
account reconciliations for credit card receivables were not designed to appropriately identify errors and the review of these reconciliations by
management did not identify that certain reconciling items lacked sufficient support. This control deficiency resulted in an adjustment in the
fourth quarter to the credit card receivables and selling, general and administrative expense by failing to correct errors in the account balance
on a timely basis.
Additionally, these control deficiencies could result in a misstatement of the aforementioned account balances or disclosures that would result
in a material misstatement to our annual or interim consolidated financial statements that would not be prevented or detected. Accordingly,
management determined that these control deficiencies are material weaknesses in internal control over financial reporting as of January 28,
2012.
The effectiveness of the Company’s internal control over financial reporting as of January 28, 2012 has been audited by
PricewaterhouseCoopers LLP, an independent registered certified public accounting firm, as stated in their report which is included on page F-
1 herein.
Remediation Efforts to Address Material Weaknesses
Identified in the third quarter
Management first reported two material weaknesses in internal control over financial reporting on Form 10-Q during the quarter ended
October 29, 2011 filed on December 22, 2011. These material weaknesses in our internal control over financial reporting related to inventory
resulting from certain information technology issues, as described above, experienced in July 2011 and August 2011 resulting in the financial
results reported as part of our initial earnings release on November 17, 2011 not reflecting the full amount of markdowns that were actually
taken on our merchandise. The additional markdowns reduced gross margin and inventory by $2.2 million from the amounts initially reported
for the third quarter. Understated markdowns in the second quarter were not material (approximately $0.1 million).
The following are the material weaknesses and status of remediation activities through January 28, 2012:
We did not maintain effective controls to verify the accuracy of the Perpetual System unit balances. Specifically, we did not review the
reconciliation of the retail stock ledger (RSL) and Perpetual System inventory balances for the month ending July 30, 2011 and therefore did
not detect the understatement of units in the Perpetual System and the resulting understatement of permanent markdowns on a timely basis.
During the fourth quarter, we added another level of review to the monthly reconciliation of the RSL and Perpetual System inventory balances.
We tested the newly implemented control and found it to be effective and have concluded as of January 28, 2012, this material weakness has
been remediated.
We did not maintain effective controls related to communication of system incidents. Specifically, we determined that IT operations personnel
followed protocols for issue resolution; however, because of the uniqueness and potential impacts of the incident, 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.
We have made progress but have not yet completed remediation activities to address the information technology control weakness as follows:
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2)
Credit card receivables
1)
Inventory Accounting
2)
Information Technology
• We are implementing procedures to ensure formal communication and documentation with finance and other department heads
related to issue resolution.
•
We are adding procedures to regularly review systematic schedule changes that have been temporarily placed on hold.
• We are monitoring the capacity issue on our legacy inventory system on a daily basis until we go-live with the replacement system
in 2012.