Groupon Got So Used To Excluding Expenses In Calculating Earnings That It Went A Little Overboard

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Remember how when Groupon was going to go public it had this cute accounting category that it called "adjusted consolidated segment operating income" which is mostly a long way of saying "earnings before everything"? If not, quick recap: (1) that happened, (2) everyonemade fun of their initial S-1 filing because of it, (3) the SEC told them to cut it out, (4) they did, and (5) everyone still made fun of them until oh today or so. In a shocking development, it turns out that, under the new JOBS Act, you wouldn't have been able to make fun of Groupon about this for months before their IPO, because they would have filed in secret with the SEC and the SEC would have maybe corrected it and you wouldn't have heard about it until 21 days before launch.*

Who cares?, you ask, and you are right. It's hard to get all that excited about the earnings before everything measure because the thing about non-standard non-GAAP measures is (1) everyone ignores them unless (2) you convince them not to ignore them which (3) you won't if they're ludicrously stupid measures like "earnings before expenses." So, problem kind of solved. The Groupon fiasco was funny because Groupon reported a total vanity measure of profitability in its S-1 and everyone, right down to the SEC, had a good laugh about it and was all "come on man," and Groupon was all "yeah, fair, you got us, we'll take it out."

Possibly less funny is the whole "so we overstated [understated !] net income [loss !] by $22.6 million [53%!] for 4Q2011 because, turns out, our refund expenses are a lot higher than we'd been telling you they were and also we have no control over our accounting function but our CFO is awesome" announcement Groupon made on Friday. Oops! The thing about that is that GAAP things like, y'know, revenue and net income, tend to be more important to people than ACSOI, and when they are screwed up the reaction is less tolerant amusement and more suing. So much suing.

A thing you could reasonably ask is if, prior to Groupon's IPO, you could have corrected one but not both of (1) the weakness in its accounting controls and its refund modeling that led to the Q4 restatement and (2) the inclusion of a transparently silly non-GAAP measure alongside real (and, in this counterfactual, correct!) income measures in its financials, which would you choose? Speaking only for myself, I'd rather correct the thing that actually affects the top line, the bottom line, and the stock price. The SEC went with option (2).

That's not fair of course - it was much, much easier to figure out that ACSOI was silly than it was to root out internal control problems that, as of Groupon's IPO, hadn't even produced any wrong numbers. (That we know of yet!) The SEC's job is not to micromanage every company's accounting function to make sure it's not fudging the numbers. Still, it's a little fun to read Groupon's latest in the context of a couple of other things, which are, first, William Cohan complaining that the SEC won't dig up juicy dirt for his books or something, honestly, just, what?, and second, this DealBook thing where they got a defense lawyer and a plaintiff's lawyer to opine on why there are fewer securities class action settlements these days, and the plaintiff guy is all:

One of the trends that we have noticed is a conspicuous drop in restatements, despite the fact that many public companies — including mortgage lenders, insurers and Wall Street banks — were accused of having not been fully accounting for the true value and risk of the mortgage-related assets that were on their balance sheets.

Several analysts have questioned how it is that fewer banks restated financial results after the financial crisis than before. That there has been a decline in restatements by companies that declared their financial strength only weeks and months before their entire industry came to the brink of insolvency in 2008 raises questions as to the reliability of financial reporting.

That fewer securities cases involve financial restatements and GAAP violations might even suggest that fewer companies are acknowledging, or being forced to acknowledge, the inaccuracies in their financial reporting.

So, like, (1) fair, though (2) less so after Groupon, but (3) maybe you should be looking into the reliability of financial reporting, guy who gets paid millions of dollars to vigorously advocate on behalf of institutional investors who have been ripped off by shoddy financial reporting!

One thing to take away from this is that several of your most important (? loudest and most punitive, anyway) watchdogs over public companies - the SEC, securities class action firms, William Cohan - are at their best in reacting to shenanigans that are either formally obvious (saying in big bold letters in your S-1 "here is where the misleading financial metrics start!") or have already been confessed (saying in your earnings 8-K/A ... well, saying much of anything in an 8-K/A).

This doesn't leave the JOBS Act off the hook, by the way - it also softens the requirement that sub-$1bn public companies get their auditor to certify the quality of their internal controls, whose quality in the case of Groupon appears to be certifiably poor. And unlike the SEC and the plaintiffs' lawyers, auditors actually are in the business of micromanaging their clients' accounting function to make sure they're not fudging the numbers.** There's probably not much reason to worry about the mini-Groupons of the future taking their nonstandard-accounting embarrassment offline into a private chat with the SEC; there's a lot more reason to worry about softening their requirements to report to one of the few watchdogs who might keep an eye on the bits that could actually matter.

In Wake of Groupon Issues, Critics Wary of JOBS Act [WSJ]
Will the JOBS Act Mean More Surprises Like Groupon's? [Bloomberg]
Understanding the Dip in Class-Action Securities Settlements [DealBook]

* Or more realistically, in the absence of public ridicule, the SEC would not have corrected it and you wouldn't have heard about it until - well, also before launch, because there it'd be in the S-1, and you'd be hearing about it from all the people making fun of it, sort of like you did anyway, only this time you'd have less time to forget about it before the launch of the IPO because it'd still be screwy when they went effective.

** Nah, kidding. But it's more their function than anyone else's, I guess.

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