Tag Archive for Ipo

Is Groupon (Nasdaq: GRPN) the Next Enron?

Is Groupon the next Enron? … No. It’s worse.
Before the company even went public, there were signs that internal financial controls weren’t up to snuff.
Now I’m hearing refrains of “three blind mice” as “defrauded” investors line up to have their day in court. You might as well say the “dog ate my homework.” It’s not like no one knew this was coming. The U.S. Securities and Exchange Commission (SEC) made management redo Groupon’s financial statements and accounting practices not once, but twice before the company’s January 2011 initial public offering (IPO).

The first time involved including the cost of marketing in operating income – duh. The second was to force the company to deduct merchant payments from revenues – double duh!

Both are basic accounting principles.

If you spent $2 to gain $1 in orders you have to report that as a $1 loss if you’re dealing with cold, hard cash. Also, if you have $1 in merchant payments, you can’t count that as $2 in revenues, unless apparently you work at Groupon and love accrual accounting.

It’s not like Groupon execs can claim they didn’t know.

It’s abundantly clear to me that the “company” has very little, if any, understanding of REG FD and securities litigation.

(REG FD, in case you are not familiar with it, is short for Regulation Fair Disclosure which the SEC adopted Aug. 15, 2000. REG FD is intended to eliminate selective disclosure of material non-public information.)

But I have a hunch they’re going to find out the hard way.

Groupon’s “Material Weakness”

When the SEC came knocking again on April 2nd the company was forced to restate its Q4 financials. That summarily reduced Groupon’s revenue by $14 million and profits – assuming there were any to begin with – by $22.6 million.

In an official statement, Ernst & Young, the company’s primary auditor, noted “material weakness” with regard to the company’s internal controls. Investors simply noted that they’d better get going while the going was good.

Groupon’s share price tumbled 16.87% Monday alone and is down 55% from its peak.

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