Photo: Okko Pyykko / Flickr, CC
The SEC probe into Groupon’s lousy accounting controls came as no surprise to Anthony Catanach Jr., an associate professor in the School of Business at Villanova University, and J. Edward Ketz, an associate professor of accounting in the Smeal College of Business at Pennsylvania State University.They took a victory lap around their blog after the daily deal giant restated its earnings on April 1 because they urged the SEC back in August 2011 to audit its internal control system, and in September 2011 wrote, “Groupon has a 100 per cent probability of earnings manipulation.”
The SEC is at the beginning of the process of looking into Groupon’s books, the Wall Street Journal reported. The company restated its Q4 2011 earnings after it failed to properly account for “an increase to the Company’s refund reserve accrual to reflect a shift in the company’s fourth quarter deal mix and higher price point offers, which have higher refund rates.”
Groupon has had run-ins with the SEC before, and previously changed its income statement definitions and its disclosures to reflect the SEC’s concerns before it went public, which is why the SEC’s latest move is so tantalising.
The difference between Catanach, Ketz and the rest of us is that they actually understand what a “refund reserve accrual” is, and why Groupon might not have a firm grasp of it. Broadly, they point to two problems inside the coupon creator:
- Villanova School of BusinessCatanachGroupon grew so fast it’s almost certain that its financial controls are a mess. In August Catanach wrote, “It is absolutely ludicrous to think that Groupon is anywhere close to having an effective set of internal controls over financial reporting having done 17 acquisitions in a little over a year. When a company expands to 45 countries, grows merchants from 212 to 78,466, and expands its employee base from 37 to 9,625 in only two years, there is little doubt that internal controls are not working somewhere. … Don’t forget that Groupon admitted to having an inexperienced accounting and reporting staff.”
- Smeal College of BusinessKetzGroupon’s financial metrics are flashing red warning signs. Using the eight-variable Beneish statistical model which uses ratios based on Groupon’s own reported numbers, Catanach predicted in September that “Groupon has a 100 per cent probability of earnings manipulation based on 2009 and 2010 financial data.”
To be fair, earnings restatements are not unusual among publicly traded companies, and Groupon and its management have not been accused of any wrongdoing or “manipulation.” Nonetheless, Groupon is now going through everything Catanach and Ketz said last year it would have to go through in order to put its books in order.
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