On March 30, 2012,
Groupon, Inc. filed the following statement with the Securities and Exchange Commission concerning its internal controls over financial reporting:
- We did not maintain financial close process and procedures that were adequately designed, documented and executed to support the accurate and timely reporting of our financial results. As a result, we made a number of manual post-close adjustments necessary in order to prepare the financial statements included in this Form 10-K.
- We did not maintain effective controls to provide reasonable assurance that accounts were complete and accurate and agreed to detailed support, and that account reconciliations were properly performed, reviewed and approved. While these activities should be performed in the ordinary course of our preparing our financial statements, we instead needed to undertake significant efforts to complete reconciliations and investigate items identified in those reconciliations during the course of our financial statement audit.
- We did not have adequate policies and procedures in place to ensure the timely, effective review of estimates, assumptions and related reconciliations and analyses, including those related to customer refund reserves. As noted previously, our original estimate disclosed on February 8 of the reserve for customer refunds proved to be inadequate after we performed additional analysis.
Ernst and Young, Groupon's auditor, has
consistently issued a clean audit opinion on the financial statements of Groupon – a company
that recently went public. This company though, has struggled with properly
recognizing revenue each year.
According to SEC filings, the
Company has restated its previously issued Consolidated Statements of
Operations for the years ended December 31, 2008, 2009 and 2010 to correct
for an error in its presentation of revenue.
The Company restated its reporting of revenues from Groupons
to be net of the amounts related to merchant fees. Historically, the Company
has reported the gross amounts billed to its subscribers as revenue.
The following tables summarize the
corrections on each of the affected financial statement line items for each
period presented (in thousands).
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Is it appropriate for Ernst and Young to be issuing a
clean opinion[1]
on the financial statements with the caveats that Groupon management has
publicly disclosed?
While significant internal control weaknesses do not
preclude a clean opinion on the financial statements, it seems to me, the
auditing profession ought to get away from pro-forma opinions and offer an
opinion that is more nuanced and offers the investing public greater insight
into the financial activities of the company.
Ernst and Young cited the restatement in a Note to the financial
statements, but never disclosed the control weaknesses management reported to the
Securities and Exchange Commission.
Most people would have a hard time trying to piece
together the puzzle of Groupon’s accounting practices.
Auditors need to start presenting more useful
information to the public.
[1] “In our
opinion, the financial statements referred to above present fairly, in all
material respects, the consolidated financial position of Groupon, Inc. at
December 31, 2009 and 2010, and the consolidated results of its operations
and its cash flows for each of the three years in the period ended
December 31, 2010, in conformity with U.S. generally accepted accounting
principles.”
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