Accounting Irregularities at Groupon
Accounting Irregularities at Groupon
Introduction
In September 23 2011, Groupon (the Company), a rapidly growing online coupon merchant was forced by the SEC to file a restated S-1 registration statement. The reason for the restatement was that the SEC objected to the accounting methods that Groupon used in the calculation of its revenue, causing it to be overstated. According to Villanova University (2012), Groupon’s auditors at Ernst & Young stated that Groupon was not setting aside sufficient funds to cover potential refunds to customers and this was allowed to persist due to “material weakness in the company’s internal controls”.
Background
When a customer purchases a coupon through Groupon’s website, the Company and the retailer split the profit 50-50, but the irregularity discovered was that the company had been reporting the entire purchase amount as its own revenue. This practice resulted in the revenue from each sale being doubled, and what Groupon reported as its Gross Profit was actually its real revenue. This accounting practice was initiated when Groupon prepared its S-1 registration using what Coenen (2012) refers to as a controversial non-GAAP metric called Adjusted Consolidated Segment Operating Income (ACSOI). In using this method the company reported explosive revenue growth from 2009 where it reported $30 million to 2010’s reported $713 million or 23-fold growth. Figure 1 shows Groupon’s year end income statements (in thousands) for the years ending 2008, 2009, and 2010. It is apparent how the effect of its revenues was overstated by not correctly reporting its revenues: Figure 1 Source: Catanach(2011)
The company claimed the right to use this method when it used the verbiage in its S-1 that it “Records the gross amount it receives from Groupons, excluding taxes where applicable, as the Company is the primary obligor in the transaction, and records an allowance for estimated customer refunds on total revenue primarily based on
Introduction
In September 23 2011, Groupon (the Company), a rapidly growing online coupon merchant was forced by the SEC to file a restated S-1 registration statement. The reason for the restatement was that the SEC objected to the accounting methods that Groupon used in the calculation of its revenue, causing it to be overstated. According to Villanova University (2012), Groupon’s auditors at Ernst & Young stated that Groupon was not setting aside sufficient funds to cover potential refunds to customers and this was allowed to persist due to “material weakness in the company’s internal controls”.
Background
When a customer purchases a coupon through Groupon’s website, the Company and the retailer split the profit 50-50, but the irregularity discovered was that the company had been reporting the entire purchase amount as its own revenue. This practice resulted in the revenue from each sale being doubled, and what Groupon reported as its Gross Profit was actually its real revenue. This accounting practice was initiated when Groupon prepared its S-1 registration using what Coenen (2012) refers to as a controversial non-GAAP metric called Adjusted Consolidated Segment Operating Income (ACSOI). In using this method the company reported explosive revenue growth from 2009 where it reported $30 million to 2010’s reported $713 million or 23-fold growth. Figure 1 shows Groupon’s year end income statements (in thousands) for the years ending 2008, 2009, and 2010. It is apparent how the effect of its revenues was overstated by not correctly reporting its revenues: Figure 1 Source: Catanach(2011)
The company claimed the right to use this method when it used the verbiage in its S-1 that it “Records the gross amount it receives from Groupons, excluding taxes where applicable, as the Company is the primary obligor in the transaction, and records an allowance for estimated customer refunds on total revenue primarily based on
References: Catanach, A. H. (2011). Grumpyoldaccountants.com. Retrieved from http://blogs.smeal.psu.edu/grumpyoldaccountants/archives/191 CFO. (2012). Retrieved from http://www3.cfo.com/article/2012/4/accounting-tax_groupon-ernst-young-restatement Coenen, T. L. (2012). Sequence Inc. Forensic Accounting, Invistigations & Expert Serivces. Retrieved from http://www.sequenceinc.com/fraudfiles/2011/09/groupon-restated-numbers-reveal-failure-of-business/ MarketWatch. (2012). Retrieved from http://www.marketwatch.com/investing/stock/grpn Securities Exchange Commission. (2012). Retrieved from http://www.sec.gov/Archives/edgar/data/1490281/000104746911008207/a2205238zs-1a.htm Villanova University. (2012). Retrieved from http://www1.villanova.edu/villanova/business/departments/accountancy/aisfacultyresearch.html