ANTHONY H. CATANACH JR. is an associate professor in the School of Business at Villanova University, as well as the Cary M. Maguire Fellow at the American College Center for Ethics in Financial Services. His professional experience includes five years as an audit manager with KPMG and six years in the financial services industry. Dr. Catanach has received numerous awards for his publication, teaching, and curriculum innovation efforts. He has authored numerous articles on a variety of accounting, finance, and management issues, as well as several business education texts..
Groupon amended its registration a third time on Friday September 23, but this time there is an improvement. The S-1/A#3 restates the income statement to report the proper numbers for revenues, pretty much as we said a month ago. It is refreshing and satisfying to see that sometimes our writings have an impact on practice.
You will recall that in August we wrote that you should not trust Groupon’s accountants. In the previous registration statements, Groupon stated 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 historical experience…the Company also records costs related to the associated obligation to redeem the award credits granted as issuance as an offset to revenue. (emphasis added)
This accounting method was wrong—it did not follow generally accepted accounting principles. The accounting policy did not conform to the requirements of Emerging Issues Task Force (EITF) 99-19. As the company stated, the merchants are responsible for fulfilling the obligation to deliver the goods and services, which means that Groupon in fact is not the primary obligor but is a guarantor of sorts. This conclusion is further bolstered by observing that Groupon has no inventory, cannot set product or service price, cannot change the product and does not perform part of the service, has no discretion in supplier selection, and is not involved in product or service specifications.
SEC Staff Accounting Bulletin 101 on Revenue Recognition, Question 10 specifically, is congruent with EITF 99-19. The SEC stated that firms should report revenues on a net basis if they did not take title to the products, did not have the risk and rewards of ownership, and acted as an agent or broker.
All of these indicia imply that Groupon should have reported revenues on a net basis instead of a gross basis. Why its auditor initially allowed gross reporting of revenues is beyond our understanding—and its understanding of EITF 99-19 and SAB 101.
Because of the clear violations of GAAP, we complained to the SEC via its Whistleblower Program. We supplied the SEC with a copy of our article and said that it should review Groupon’s filings and make a decision whether Groupon can account for its revenues on a gross or net basis.
Apparently the SEC intervened, as reported by Shayndi Raice in “More Trouble for Groupon IPO,” The Wall Street Journal. Douglas MacMillan at Business Week adds: the Groupon Chief Operating Officer is leaving Groupon and going to Google.
Groupon now shows the revenues on a net basis. Footnote 2 of the latest S-1/A contains Groupon’s mea culpa, such as it is. The reader sees the following:
| Revenues (000) | As previously reported | Restatement adjustment | As restated |
| 2008 | $ 94 | $( 89) | $ 5 |
| 2009 | 30,471 | ( 15,931) | 14,540 |
| 2010 | 713,365 | (400,424) | 312,941 |
We still think there are various issues in the accounting at Groupon; further, the analysis of their financial statements reveals many question marks. But at least the revenues are properly stated on a net basis, just as we told you they should be.
This essay reflects the opinion of the authors and not necessarily the opinions of The Pennsylvania State University, The American College, or Villanova University.
J. EDWARD KETZ is an associate professor of accounting in the Smeal College of Business at Pennsylvania State University. He has a bachelor’s degree in political science, a master’s degree in accountancy, and a Ph.D., all from Virginia Tech. Professor Ketz has been a member of the Penn State faculty since 1981. He also has taught at the University of Connecticut and the University of Maryland. Professor Ketz has authored and edited 17 books including Hidden Financial Risk (Wiley, 2003) which examines the corporate culture and the institutional setting that engendered recent accounting scandals. Dr. Ketz has been cited in the popular and business press, including The Wall Street Journal, The New York Times, The Washington Post, Business Week, and USA Today. He also has appeared as an accounting commentator on CNN, National Public Radio, and Bloomberg Radio.
Groupon has just lost its second COO in six months. This is just another example that Groupon is doomed. The owners may as well get as much as they can before the whole thing collapses. Daily deal fatigue, deals that aren’t really deals, and the fact that thousands of other companies are doing the exact same thing will be the killers of this company. They should have taken the $6 billion from Google. One of the great blunders in corporate history (at least in this current era of great corporate blunders).
FYI: This issue (and corresponding accounting method) was highlighted in The May Report (a popular Chicago-based blog) shortly after the first Groupon S-1 was filed back in June.
Link to May Report Archives
Here is the text from The May Report (from an email sent in by a reader of the blog):
Take a look at the FASB Issue No. 99-19, Reporting Revenue Gross as a Principal versus Net as an Agent:
FASB Issue. 99-19 PDF
This discusses revenue recognition and the difference between GROSS vs. NET revenues for a company like Groupon. I think that most accountants who are playing by the rules would agree that Groupon’s revenues in 2010 were actually $280 million and NOT the $713 million as reported (i.e. the slice that goes to merchants should not be counted at all vs. counted as both revenue and COGS).
I know that E&Y blessed the financials, but hey…companies have pushed the envelope with the blessing of big accounting firms before (e.g. Enron, etc.).
I’m not surprised to see that Groupon is now having to report their income differently. I think a lot of things about this company are way to go to be true and we’re all seeing that slowly but surely.
I’m not sure I can say that Groupon is doomed… But I do know that as a Small Business owner that has used Groupon twice now, I am greatly concerned for Small Businesses everywhere. The mass discounting of our products and services is great for advertising but its’ not for everyone at every point in their business. Groupon and Groupon-like firms are killing small business right now. They are completely devaluing what we do. I had GREAT results with Groupon. But that was a year or so ago before everyone was taking advantage of it. Now that EVERYONE is doing these kinds of promotions, it’s hurting my business more than helping. And I know that I won’t be doing another one. I don’t know how long the Small business world can continue to be the backbone of this craze. We simply won’t be able to afford to discount our products and services forever.