A Texas-based specialty retailer and its former CEO have agreed to pay a total of $225,000 as part of a settlement with the Securities and Exchange Commission (SEC) to resolve charges of inaccurate financial reporting caused by a faulty inventory tracking system.

Tandy Leather Factory will pay $200,000 as part of the agreement, while former CEO and CFO Shannon Greene was assessed a $25,000 penalty for her role in allowing the alleged failures to take place. The accounting lapses detailed in the SEC’s order led to the company having to restate its financial statements from fiscal years spanning 2017-19.

Tandy received credit for its remedial actions taken since the SEC launched its investigation.

The details: Greene had been Tandy’s CFO since 2000 before taking on the additional role of CEO from February 2016 to October 2018. In her role, she was responsible for updating and maintaining the company’s inventory control system, the SEC stated in its order filed Wednesday.

An error in the system regarding stock keeping units (SKUs) for each item led to inaccurate logging of historical cost information. “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,” the SEC explained. The inaccurate values clashed with the representations the company was making in its financial reports regarding inventory, net income, gross profit, and other areas.

Greene was aware of this deficiency, according to the regulator, and utilized a separate manual process that did not comply with the company’s first-in, first-out accounting methodology. Tandy management as a whole was criticized by the SEC for not shoring up its system of controls in order to assure compliance with GAAP.

Once new management took over, an internal investigation was launched by the company’s audit committee in July 2019. The probe determined the company’s financial statements dating back to 2016 could not be relied upon because of material misstatements. Tandy restated its financial statements for fiscal years 2017 and 2018, interim periods for 2018, and the first quarter of 2019.

“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, in a press release. “Properly functioning disclosure controls and ICFR (internal control over financial reporting) are critical to reliable financial reporting, and we will hold companies and their responsible executives accountable for serious control failures like this.”

Tandy has since installed a new company accounting system, hired qualified accounting personnel, and engaged controls and ICFR experts to assist in the creation of a new risk control matrix, the SEC stated.