Zales reported this month, September 2009, that the financial statements it filed for its fiscal year ended in 2008 and for parts of its fiscal year ending in 2009 have accounting errors and cannot be relied on.

The Zales Corporation, based in Irving, Texas, has admitted that its management, its independent external auditing firm (Ernst & Young,) and its Board of Directors’ Audit Committee believe that the financial statements that Zales has previously issued for 2008 and 2009 should be restated.  The errors in the previously filed reports could be “material” according to a filing the company made with the Securities and Exchange Commission (SEC.)

Zales’ 2009 annual report is due to be filed with the SEC by October 29 of this year.  However, the 2009 annual report may be filed late “if unforeseen circumstances arise” according to the text of the SEC filing.  The “unforeseen circumstances” usually are that the external auditors and the internal accountants do not really know how long it will take them to correct the mistakes.  Earlier in September, Zales twice delayed the release of its financial results of its fourth quarter and year ended July 29, 2009 because of admitted mistakes in the reports.

Some of the mistakes found:

Errors were found in the company’s bank reconciliations.  Reconciling a bank account is one of the most fundamental duties of an accounting staff.  If the firm’s accountants cannot even reconcile a bank account properly, it makes one wonder about the quality of their other work.  It also indicates poor management and supervision of the accounting department.

Zales also discovered errors in the treatment of the accounts receivables of a wholly owned subsidiary.  The subsidiary sells credit card insurance to its credit card customers.  Is it possible that the company over stated the value of the sales of an already over priced product?

Prepaid advertising has been recorded as an asset on the balance sheet when most of the related advertising costs should have been expensed.  The company recorded $ 18 million of prepaid advertising in 2007 and $ 23 million more in 2008 that should have been charged to expense and would have reduced reported income.

There will be a $ 4 million charge to income to cover an increase in 2008 federal income taxes due from the company because credits that had been claimed for net operating losses had in fact expired.  Who was reviewing these related tax returns?

The earnings forecasts made by the company in the last two years have been consistently wrong and always overstated the predicted earnings per share of the company.

See an update at:  http://www.johnbrianfastcpa.com/884/tarnished-icon/