Dive Brief:

• The Securities and Exchange Commission (SEC) announced Tandy Leather Factory of Fort Worth, Tex., and its former CEO agreed to settle charges for accounting, reporting and control failures that prompted restatements of the company’s financial statements for fiscal years 2017 and 2018 and the first quarter of fiscal year 2019.

• Tandy and its former CEO, Shannon Greene, failed to maintain historical cost information for inventory and knowingly used an inventory tracking system that did not support the company’s disclosed inventory accounting methodology, the SEC said. 

• Tandy, “the world’s largest specialty retailer of leather goods,” included flawed inventory data in its financial statements, impairing “calculations for, among other things, inventory, net income and gross profit for years,” the SEC said.

Dive Insight:

"Tandy’s inventory tracking system and related controls were critical to both its business and the information it provided investors, yet they were wholly insufficient,” said David Peavler, director of the SEC’s Fort Worth regional office. “Properly functioning disclosure controls and ICFR are critical to reliable financial reporting, and we will hold companies and their responsible executives accountable for serious control failures like this.”

Tandy’s inventory tracking system failed to maintain the historical cost basis for individual inventory items, so every new price input for a purchased inventory item changed the historical cost for all earlier purchases, the SEC said.

The system could not support Tandy’s first-in, first-out inventory accounting methodology that the company disclosed in public reports, according to the SEC.

Tandy management, while knowing of the system’s flaws, failed to design a system of controls ensuring that the company recorded transactions in conformity with generally accepted accounting principles.

The company also “failed to retain sufficient, qualified accounting personnel,” and maintain proper disclosure controls (DCP) and procedures and internal control over financial reporting (ICFR), the SEC said.

Greene wrote in Tandy’s entity-wide risk assessment (ERA) that “the structure of operations and the overall industry lends itself to a certain degree of predictability in the company’s financial performance,” according to the SEC.

“Management’s experience (length of time in the industry in particular) creates an ability to pinpoint unusual transactions, trends, fluctuations, etc.,” Greene said in the ERA. “Finally, the company’s financial statements and reporting structure lack complexity which contributes to the probability of more accurate, complete and timely financial statements.”

Yet Greene oversaw an inventory tracking system that dated back to 2000, “could hold only one cost per SKU [stock keeping unit] at a time and did not retain any historical information,” the SEC said. “As a result, when Tandy personnel input a new cost following a purchase for a given SKU, the updated cost applied retroactively to all pre-existing products associated with that SKU.”

Beginning in 2016 at the latest, Tandy said in public reports that “[i]nventory is stated at the lower of cost or net realizable value and is accounted for on the ‘first-in, first-out’ [FIFO] method. This means that sales of inventory treat the oldest item of identical inventory as being the first sold,” the SEC said.

But Tandy could not legitimately value inventory at FIFO because its tracking system updated the historical cost of inventory with the most recent cost, the SEC said. “The inaccurate inventory values flowed from the inventory system to Tandy’s financial system."

Tandy’s financial statements included additional errors because the company lacked qualified personnel to manage its control and financial reporting systems, the SEC said.

The company did not properly capitalize warehouse and handling expenses during the first and third quarters, and improperly classified the expenses as operating expenses. It also did not properly calculate appropriate inventory reserve levels for the lower of cost or net realizable value.

Without admitting or denying the SEC’s findings, Tandy and Greene each consented to cease and desist from further committing or causing these violations and pay civil money penalties of $200,000 and $25,000, respectively.  In accepting Tandy’s settlement offer, the SEC took into account remedial actions the company took promptly after learning of the issues detailed in the SEC’s order.