Overstock.com (OSTK), which is again under investigation for accounting issues, has 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 analysing public companies: It has filed a quarterly SEC document that hasn’t been reviewed by an accounting firm.
To say this behaviour is a “red flag” is so obvious as to be boring. So for now, we’re just going to describe it as bizarre.
CEO Patrick Byrne explains:
“All things are subject to interpretation; whichever interpretation prevails at a given time is a function of power and not truth.” – Friedrich Nietzsche
We have elected to file an unreviewed Form 10-Q for the period ending September 30, 2009. Here is why:
- In February 2009, we were notified by a partner that we had overpaid it approximately $700,000, but that the partner wanted to reach a mutual solution to this overpayment and another open issue (the partner has asserted that we might owe it in excess of $400,000 regarding this other issue). At that time, we doubted our ability to recover this overpayment and we could not reasonably estimate what we might recover.
- Thus, we had to decide between either immediately recognising as income a sum whose magnitude, collection, and collectability was in doubt (which we felt was an incorrect and aggressive position, especially in light of the economic and retail environment of the time), or whether we should take a more conservative position of negotiating with this vendor who owed whom, how much, and on what terms, including timing of payment, and recognising those sums only if and when we received the payments.
- The accounting for this transaction required significant judgment and interpretation of the facts and circumstances — which others with 20/20 hindsight might later question. Weighing all the facts and circumstances at the time, we decided it would be a mistake to book this overpayment as an asset as of December 31, 2008, deciding instead to recognise the sums as we recovered the money (that is, we thought the conservative position was the correct position). Our auditors at the time, PricewaterhouseCoopers (“PwC”), agreed with this course of action, and we prepared our 2008 Form 10-K on the basis of this decision.
- Although PwC had given us eight years of fine service, after we filed our 2008 Form 10-K, we ran a formal RFP process for selecting our 2009 auditors as a reflection of my belief that changing auditors every decade or so might be healthy. Grant Thornton won that RFP, and the Audit Committee selected Grant Thornton as our 2009 auditor.
- Before Grant Thornton took our audit engagement in Q1 2009, it reviewed our filed 2008 Form 10-K and told us it was comfortable with our past accounting practices.
- In late Q1 2009, we received $785,000 relating to the partner overpayment discussed in point 1 above (even though the other issue with that partner remained unresolved). Thus, we recognised $785,000 in our 2009 Q1 Form 10-Q financials, which Grant Thornton reviewed as our auditors. In addition we highlighted $1.9 million (of which the $785,000 was a part) attributable to the collected overpayment, certain partner under-billing collections, and a freight carriers’ refund of overcharges in one-time, non-recurring income in that quarter’s earnings release, earnings conference call and Form 10-Q.
- As our auditors, Grant Thornton reviewed our financial statements in Q1 and Q2 2009 before we filed Form 10-Q’s for those quarters. Throughout 2009, our Audit Committee has repeatedly asked Grant Thornton if there was any accounting that it would do differently, and repeatedly received the answer, “No.” In fact, as recently as late-October 2009, Grant Thornton confirmed to us that it supported our accounting method for recognising the $785,000.
- In early October and again in early November, the SEC sent us comment letters asking us, among other things, to advise it on and justify the accounting treatment we used regarding the $785,000.
- Last week, Grant Thornton advised us that, on further consultation and review within the firm, it had revised its position and that it now believes that we should have recorded the $785,000 as an asset in 2008. As a result of its accounting position, Grant Thornton said it would be unable to complete its review of the financial statements in our Q3 Form 10-Q unless we amended our previous 2009 quarterly filings and restated our 2008 financial results. On November 13, Grant Thornton also advised us that it believes that we should make disclosure or take action to prevent future reliance on our March 31, 2009 financial statements and June 30, 2009 financial statements filed in our Q1 and Q2 Form 10-Q’s, as a result of this issue.
- We disagree with Grant Thornton. We, along with PwC, continue to believe that we have accounted for the $785,000 correctly and thus our Q1 and Q2 financial statements are correct. Both we and PwC believe that it is not proper to reopen our 2008 Form 10-K, subject to resolution with the SEC of its comment letters.
- Thus, we are in a quandary: one auditing firm won’t sign-off on our Q3 Form 10-Q unless we restate our 2008 Form 10-K, while our previous auditing firm believes that it is not proper to restate our 2008 Form 10-K. Unfortunately, Grant Thornton’s decision-making could not have been more ill-timed as we ran into SEC filing deadlines.
As a result, we have elected to dismiss Grant Thornton, file an unreviewed Q3 Form 10-Q (as we have no current auditor), continue to work with the SEC on the issues addressed in its comment letters, and engage another independent audit firm. Once we have completed these last two items, we will file a reviewed Q3 Form 10-Q/A.
In the meantime, I will continue to focus on the business during this busiest part of the year.
I will hold a conference call to further explain and answer questions regarding this matter on Wednesday afternoon at 5:00 p.m. EST (details below). Until then, I remain,
Your humble servant,
Patrick M. Byrne