Overstock.Com: Unusual/Conflicting Accounting Principles Impact
Abstract Overstock. com, also known as O. co, with headquarters in Salt Lake City, Utah was founded in 1999 by Patrick S. Byrne, its CEO and Chairman of the Board of Directors. Byrne “recognized the potential in liquidating excess inventory through the Internet. Up until then, consumers had relied upon outlet centers with crowds and limited product selections for finding bargains, and small retailers found little access into the world of closeout merchandise” (O. co, 2010). Meantime, the art of online shopping seemed to be skyrocketing. In 1999 Overstock. com reported a “$1. million in annual revenue to over $1 billion in revenue in 2010. Overstock. com is a major online retailer offering a wide variety of high-quality, brand name merchandise, including bedding, home decor, appliances, watches, jewelry, electronics, sporting goods, clothing and shoes. They provide customers with convenient shopping while offering manufacturers, distributors and other retailers an alternative sales channel” (Commerceinterface, 2011). .But, were these figures correct? Let’s take a closer look into the reports issued by Overstock. com. OVERSTOCK. COM: UNUSUAL/CONFLICTING ACCOUNTING PRINCIPLES IMPACT
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Overstock. com has recently received negative publicity because of some decisions regarding GAAP, internal accounting policies and their relationship with external auditors that has caused the company to have to restate their published financial statements going back to 2008. In their 2010 10K report on page 19 it is stated that “We lacked a sufficient number of accounting professionals with the necessary knowledge, experience and training to adequately account for and perform adequate supervisory reviews of significant transactions that resulted in misapplications of GAAP.
Information technology program change and program development controls were inadequately designed to prevent changes in our accounting systems which led to the failure to appropriately capture and accurately process data” (FAQ’s, 2010). In fact,” Overstock. com violated Generally Accepted Accounting Principles (GAAP) in accounting for its recoveries of certain offsetting costs and reimbursements amounts due to the company from its fulfillment partners (suppliers) who were under-billed in previous reporting periods, from Q1 2007 to Q 2 2008. Overstock. om should have restated its financial reports to recognize income when those offsetting costs and reimbursement amounts were actually earned by the company in those previous reporting periods. Instead, the company improperly recognized income as those amounts were collected in future accounting periods (Q4 2008 to Q3 2009) on a non-GAAP cash basis. In one instance, Overstock. com improperly reported Q4 2008 profits, even though the company should have reported a loss under accounting rules” (Antar, 2010). “The Big O also admitted that it ‘incorrectly amortized the expense under the plans’.
While they were at it, they threw a bunch of other corrections that were ‘[not] material either individually or in the aggregate,’ as the saying goes” (Newquist, 2010). For errors in accounting to reach this scale, it is inevitable to see that there had to have included a number of the company’s top level officials in both the accounting and executive departments. The bottom line is that the accounting department has the responsibility to provide not only to managers but also to investors the necessary information to make the correct decisions.
The management of a company is responsible to for the accuracy of the financial statements. A point to consider, and which could be the most material and important one, was the shameless attempt of Overstock. com to publish the misleading financial statements. It is quite obvious that Overstock. com violated the GAAP by producing, sort of speak, an illegal reserve to materially inflate future earnings or reduce future losses from Q4 2008 to Q3 2009. “Overstock. om ridiculously claimed that the collection of the entire amount of its underbillings (every single penny) “was not assured” and instead falsely claimed that a “gain contingency” existed rather than make a reasonable estimate of uncollectable amounts as required under SFAS No. 5. Therefore, Overstock. com improperly recognized income from underbilled fulfillment partners as amounts due to the company were collected on a non-GAAP cash basis, rather when they were earned under accrual accounting or GAAP” (Antar, 2010). Overstock. com clearly and without precedence iolated its published mission and vision statements which clearly states: “Overstock. com’s Mission: To save people money. Overstock. com’s Vision: Overstock. com provides online shoppers with the best value and a superior customer experience. We are honest, helpful, efficient, accountable, and trustworthy, and are committed to profitability and service” (O. co, 2010). “According to Overstock. com’s S-1 filed in March 2002, during Overstock. com’s entire history, the company had lost money: •Fiscal Year Ended December 31, 1997: $661 thousand net loss •Fiscal Year Ended December 31, 1998: $1. million net loss •Fiscal Year Ended December 31, 1999: $8. 4 million net loss •Fiscal Year Ended December 31, 2000: $21. 3 million net loss •Fiscal Year Ended December 31, 2001: $13. 8 million net loss” (Antar, 2010). Patrick Byrne could have easily mitigated the impact of the situation by issuing a public apology and admitting the mistakes, instead Byrne showed his total disregard for the rules in place for public companies. CEO Byrne in November 16, 2009 “fired its auditor, Grant Thornton.
As of now, therefore, Overstock no longer has an accounting firm. Overstock has also done something we can’t recall seeing in 15+ years of analyzing public companies: It has filed a quarterly SEC document that hasn’t been reviewed by an accounting firm” (Blodget, 2009). On the same day Byrne issued a letter via press release where he quotes Friedrich Nietzsche, stating ” All things are subject to interpretation; whichever interpretation prevails at a given time is a function of power and not truth” and signs the letter “your humble servant” (Blodget, 2009).
By the way, Friedrich Nietzsche was a 19th century German philosopher “who challenged the foundations of Christianity and traditional morality. He was interested in the enhancement of individual and cultural health, and believed in life, creativity, power, and the realities of the world we live in, rather than those situated in a world beyond” (Wicks, 2011). Sam Antar on October 31, 2011 reported that Overstock. com “faces possible insolvency if current earnings trends continue and it cannot restructure two loans with U.
S. Bank, its biggest creditor by March 31, 2012 at the latest. In an apparent effort to mask its weakening net working capital position, it played a shell game to window dress its balance sheet at the end of the third quarter (September 30, 2011). Overstock. com owed U. S. Bank $20. 329 million under the “Master Lease Agreement” (sale-leaseback) and another $17 million under a “Financing Agreement” (line of credit). Therefore, the company owes U. S. Bank $37. 329 million under two loan agreements. Overstock. om also has to contend with an ongoing investigation by the Securities and Exchange Commission into securities law violations after this blog exposed it fabricating its earnings. So far, every single financial report issued from its inception to Q3 2009 had to be restated up to three times due to violations of Generally Accepted Accounting Principles. The company is being sued by District Attorneys from seven California District Attorneys who are alleging consumer fraud. They are seeking at least $15 million of restitution, fines, penalties, and cost reimbursements from the company for allegedly defrauding consumers.
The Judge in that case had to compel an uncooperative Overstock. com to turn over information to the California District Attorneys”. In the past I have purchased from Overstock. com. After doing the research for this essay I will discontinue using them. I am not the type to tell anyone where to go and what to do, but I would definitely recommend to everyone to do some background research into any company before having any dealings with them. References Antar, Sam E. (2010, February 7). Overstock. com must restate finances again. Retrieved from: http://seekingalpha. om/article/187066-overstock-com-must-restate-finances-again Antar, Sam E. (2010, November 23). Legal problems finally catching up with Overstock. com. Retrieved from: http://seekingalpha. com/article/238235-legal-troubles-finally-catching-up-with-overstock-com Antar, Sam E. (2011, October 31). Overstock. com (O. co): Insolvency looming? Retrieved from: http://whitecollarfraud. blogspot. com/ Antar, Sam. (2010). Case study on overstock. com. (p. 9). Retrieved from: http://cleveast. imanet. org/Meonske/43010OverstockComAntar. pdf Blodget, H.