Here's the opening paragraph from a press release released by Stein Mart today:
Stein Mart, Inc. (Nasdaq:SMRT) today announced that in connection with a review of the Company's auditor relationship, on June 6, 2013, a request for proposal was sent to several national accounting firms, including PricewaterhouseCoopers LLP (PwC). On June 11, 2013, PwC informed the Company that it was declining to stand for re-election at the Company's Annual Meeting of Shareholders and that, accordingly, the auditor-client relationship between PwC and the Company was terminated as of that date.
Interesting! If you take a look at the company's most recent proxy statement, you'll see that in 2011, Stein Mart paid just over $1 million in audit fees. In 2012, however, the company paid $3.4 million. Yeesh.
The reason for this? The company informs us that it's due to restatements they had to make going back to their 2010 fiscal year.
So, I suppose if your audit fees triple, you're willing to shop around and that's just what SMRT did. Some of the guys and gals and PwC no doubt saw where this was going and just said, "Hey, we'll make your decision a little easier."
What's the new audit firm in for? Well, the 8-K gives us an idea:
During the fiscal years ended February 2, 2013 and January 28, 2012 and through June 11, 2013, the Company had reportable events related to material weaknesses in the Company’s internal control over financial reporting. The material weaknesses identified in the Form 10-Ks and Form 10-Q related to the control environment for the level of information and communication between the finance department and other department functions and the Company not having designed effective controls related to 1)( i) the finance department monitoring and evaluating the appropriate accounting for markdowns, and (ii) the finance and merchandising departments effectively communicating so that the finance department could develop appropriate accounting policies relative to markdowns, 2) financial management adequately validating the assertions made by real estate operations management regarding the future value of leasehold improvements made by the Company, 3) financial management effectively communicating with human resources personnel to fully understand the Company’s vacation policy, 4) the indirect cost capitalization adjustment in interim periods, 5) (i) information technology personnel effectively communicating the nature of certain software expenditures to the finance department resulting in the amortization of software costs over an improper period and (ii) financial management effectively communicating with information technology personnel to timely identify and remove retired software assets from the accounting records, 6) the IT department effectively communicating system incidents to the appropriate personnel, 7) the appropriate identification of errors in and the review of credit card receivable reconciliations by management, and 8) the review of the reconciliation of the retail stock ledger (RSL) and Perpetual System inventory balances.
Whew! That's a load.
But good news, prospective SMRT auditors — the company states that it "has remediated the material weaknesses related to the appropriate identification of errors in and the review of credit card receivable reconciliations by management and the review of the reconciliation of the retail stock ledger (RSL) and Perpetual System inventory balances," and is working on sorting out the other six MWs. That sounds like progress!
Officially, PwC is going for the clean break, agreeing with everything in the filing that concerns them. Whether they got the feeling that they had no chance of winning the RFP or figured there was nothing else they could teach Stein Mart, we'll never know, but I'm sure PwC is proud to have brought them this far.
