Groupon Is Setting Off Major Accounting Red Flags

Andrew MasonGroupon CEO Andrew Mason

Photo: Scott Olson/Getty Images

Groupon, Inc.’s managers might celebrate that the daily deal website’s shares gained more than 4% of their value last week, after Morgan Stanley vouched for them with a ratings upgrade announcement. But the stock price’s more than 50% decline during the year to date underscores the importance of corporate governance. More than a year since critics voiced concerns about Groupon’s accounting, its management continues struggling to regain credibility.Groupon’s stock was trading at around $10.00 per share intraday on Monday. It had jumped 10.8% to $11.15 per share on the previous Monday, after news hit that Morgan Stanley upgraded Groupon’s stock to overweight from equal weight. The New York financial services firm noted positives such as the company’s investment in technology that targets subscribers, according to news reports.

Ever since Morgan Stanley led Groupon’s initial public offering in November 2011, the company has had a dismal performance in the market that some had foreseen. In June 2011 the Grumpy Old Accountants, a blog by Anthony Catanach of Villanova University and Edward Ketz of Pennsylvania State University, wrote that “overall, the (Groupon) balance sheet stinks. The income statement reeks. Cash flows are in the toilet. Instead of participating in this IPO, we would rather purchase lottery tickets.” After warning readers in August 2011 not to trust Groupon’s accountants, the grumpy old professors have continued to hammer away ever since. (GMI did not comment on Groupon because it only rates publicly traded companies.)

Meanwhile, Groupon’s co-founders Eric P. Lefkofsky, Andrew D. Mason, and Bradley A. Keywell continue messing up. When they did their first annual earnings report this March, their independent auditor Ernst & Young objected, and they had to announce revisions such as lowering the amount of fourth quarter revenue they’d reported earlier by $14.3 million and operating income by $30 million.

Groupon said in March that it’s been working for several months to prepare for a  report on the effectiveness of its internal controls by the end of 2012, and it’s also taking steps to “augment its staffing” and otherwise address the underlying causes of its challenges in reporting. CFO Jason Child did an interview with Crain’s Chicago Business on June 18, in which he reportedly said “The questions around the revision and the material weakness can be easily resolved by having several clean quarters . . . and no drama.”

And yet Groupon continues taking steps that increase the risk of upsetting the grumpy. For example, the company has in recent years acquired its German rival CityDeal Europe, the web designer Pelago, Inc, Zappedy, Inc. and  many others, racking up $166.9 million in assets that it estimated to be worth more than they were on their books as of December 2011, or around 9% of its total assets. If those estimations turn out to be wrong, Groupon’s founders will have to make painful adjustments later.

GMI does not yet rate Groupon, but it’s safe to say at this point that Lefkofsky, Mason and Keywell have work left to do on their accounting and governance.

Region:   North America
Sector:   Technology
Industry:  Internet Information Providers
Market Cap:  $6,832.564mm (Mid Cap)

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