Small square rooms tend to be particularly problematical, and I second all of the responses that have focused on room treatments and speaker positioning. In fact, looking at the photo of your setup I would be very surprised if you did NOT have the kind of smearing problem you have described.
I also particularly second the person you quoted as having "demanded" that the rear wall be treated (assuming he was referring to the wall behind the listening position). You are undoubtedly seated very close to that wall. Reflections from it will arrive at your ears strongly, and without a great deal of delay in their arrival time relative to the direct arriving sound. Again, I would be very surprised if that were NOT a major contributor to the smearing you have described.
Also, as Mapman suggested the speakers are probably too close to the front wall (the wall behind them), and they are probably too far apart.
As an experiment, at least, I suggest that you try a "near field" arrangement, moving the speakers several feet out from the wall, placing them much closer together, and moving your listening position further from the rear wall (the wall behind the listening position). (Keep in mind, though, that if you get too close to the speakers their multiple drivers may not blend optimally). That should give you a better idea of how your present equipment is capable of performing under better acoustic circumstances, and whether upgrading any of it is necessary.
Good luck. Regards,
-- Al
