Category: News

There’s Some Fuss About Groupon’s Revenue…or Profits…or Something

You may have heard that the company that encourages people to go broke by saving money, Groupon, filed a S-1 with the SEC last week to go public. It’s been a matter of hot debate as to whether this company is the real deal or simply another house of coupons. One matter that has several people sc is how the company accounts for its revenue. A reader dropped us this note yesterday:

Caleb

I am not one to bring up accounting questions on your blog as its not your web site’s background [Ed. note: Uh, you mean, accounting?]. I was wondering if you could post one question and make an exception as it relates to Groupon. How on earth did Groupon get away with Gross Revenue treatment and not net revenue? All my accounting friends from the Big 4 and even people who do not work on the Groupon audit at E&Y are stumped. All the literature points to net revenue which means they would not report gross revenue of 900 million but rather 200 million or so which represents their cut. Given how companies are valued on multiple of revenue this seems like a big issue. Any help would be appreciated by your readers.

Now it’s not exactly clear what our reader is referring to (feel free to comment below if you understand) but here’s a clip from the S-1:

Sorry for the squishiness. As you can see, Groupon is reporting revenue for 2010 of over $700 million (not sure about $900 million). They have a cost of revenue (aka cost of goods sold) of over $400 million with a “gross profit” of $279 million. Now, if you’re thinking “gross profit” should be “net revenue” you’re not alone.

From CNBC, there appears to be a debate over semantics:

Groupon accounts for its revenue differently than say eBay, and in a way that some say is misleading to potential investors. The company defines revenue as “the purchase price paid by customers.” Then there’s the issue of “the cost of revenue,” leaving the company with what it calls “gross profit,” which is “the amount of revenue we retain after paying an agreed upon percentage of the purchase price to the featured merchant.”

Here’s the thing: Many companies like eBay […], which also take a fee for transactions, would consider that “gross profit” number a “net revenue number.” UCLA Anderson School’s accounting lecturer Gordon Klein says the S-1 uses terms in a way he’s never used them before, and this unusual accounting tells him that investors should “run from the stock.” Others say this is a non-issue: Wedbush securities analyst Lou Kerner says that the company has done a totally adequate job outlining its accounting approach. Kerner says whether the company reports its revenue before or after direct costs should have zero impact on investors evaluation of the company.

And co-founder Andrew Mason admits that Groupon does things a little differently. Under a section entitled “We don’t measure ourselves in conventional ways” he writes, “we track gross profit [as a metric], which we believe is the best proxy for the value we’re creating.” But that’s all the explanation he gives. Later the filing states, “We believe gross profit is an important indicator for our business because it is a reflection of the value of our service to our merchants.” And under “How we measure our business” things are equally vague:

Gross profit. Our gross profit is the amount that we retain after paying our merchants an agreed upon percentage of the purchase price to the featured merchant. We believe gross profit is an important indicator for our business because it is a reflection of the value of our service to our merchants. Gross profit is influenced by the mix of deals we offer. For example, gross profit can vary depending on the category of product or service offered in a particular deal. Likewise, gross profit can be adversely impacted by offers that we make for the principal purpose of acquiring new subscribers or establishing our brand and building scale in a new market.

Throughout the S-1, the term “gross profit” is used 52 times. If you’re used to reading SEC Filings, the term may throw you off but ultimately the numbers are what theyare and the terms used seem secondary. If you believe “gross profit” is a bullshit metric for this business, fine that’s one thing but if they choose to use slightly unorthodox terminology, does that mean investors should ‘run from the stock’? Personally, I don’t happen to be customer of any of the banks underwriting this thing, so this of little consequence but accountants like to sweat the details, so feel free to make a case either way in the comments.

Going Concern at the ACFE Fraud and Conference Exhibit

Next week I’ll be attending the ACFE Fraud and Conference Exhibit in San Diego where many forensic and fraud sleuths will be enjoying each other’s company and one-upping each other with stories on how many criminals they’ve busted over the years. It looks like you can still register so if my presence is the dealmaker for you, then I suggest you get on this.

John Walsh, the host of America’s Most Wanted will be giving a keynote although I’m a little confused as to what he’ll share with people that comb through ledgers for a living. Anyway, if you want to get in touch with me at the conference or while I’m in San Diego, you can email me, DM or @ me on Twitter or shoot me a message on LinkedIn or Facebook. I promise I’ll respond at some point especially if you offer to drive me to the beach or buy me an old fashioned in the Gaslamp Quarter.

And if you’re not in San Diego or attending the conference, don’t worry, I’ll be on a regular posting schedule so there will be the regular dose of inflammatory nonsense coming your way.

Michigan CPAs, Welcome the Newest Member of the Club

Since we are totally above making disparaging remarks about strangers on the Internet, we present the following without comment from mlive.com:

Jessica A. Rolfe, of Yeo & Yeo P.C., 3023 Davenport in Saginaw, has received a Certified Public Accountant license and was promoted to senior accountant, providing auditing services in the firm’s Saginaw office.

Rolfe holds a bachelor’s degree from Saginaw Valley State University, and is a member of the Michigan Association of Certified Public Accountants and the American Institute of Certified Public Accountants.

Now the last time we shared one of these cheesy, free publicity “news” items, it also happened to be a Michigan CPA except that guy allegedly passed all four parts in one sitting, which the newspaper told us only happens with a lucky 4% of individuals. We’re not sure where they got that number (we suspect somewhere between their legs, towards the back end of things) but are glad to see no such claims made in this particular announcement.

We’ve said it before and we’ll say it again: if you have an announcement like this to make for the star intern in your life, please feel free to send it to us. We require at least 100 words, fact-checked claims and, of course, a Photoshopped headshot. Might I suggest Glamor Shots?

UK Whitepaper Seeks to Reconcile Mother Nature’s Books

When do you recognize maple syrup, when it is earned (sucked from the tree) or realized (when it goes down your big fat gap)? How much goodwill does a forest have?

The UK Department for Environment, Food and Rural Affairs has published its first white paper on the natural environment in 20 years hoping to answer some of these questions. The natural choice: securing the value of nature suggests the UK should set up an independent Natural Capital Committee (sort of like FASB for forests) to advise the government on when, where and how natural assets are being used unsustainably.

This would create “green accounts” which give an idea how the country’s natural assets are being used.

The authors of the paper suggest that economic growth and the natural environment are mutually compatible, implying that “nature’s bank balance” should not be ignored when looking at the country’s overall economic growth.

“Past action has often taken place on too small a scale. We want to promote an ambitious, integrated approach, creating a resilient ecological network across England. We will move from net biodiversity loss to net gain, by supporting healthy, well-functioning ecosystems and coherent ecological networks. We will publish a new Biodiversity Strategy for England, responding to our international commitments and setting a new direction for policy over the next decade,” the paper says, proving that someone obviously read their accounting textbooks before they tried to write a framework for valuing nature’s assets.

[Insert bad money doesn’t grow on trees joke here]

Presidential Candidate Tim Pawlenty Doesn’t Want to Bore You with the Gory Details About How He’ll Pay for His Proposed Tax Cuts

Former Minnesota Governor Tim Pawlenty wants to cut taxes. He’s a Republican after all and Grover Norquist probably has lewd photos and several sternly-worded letters waiting in the wings should TP give the impression that he’ll do anything but slash rates.

Pawlenty’s plan calls for two rates, 10% for on the first $50k/$100k (single, married) earned and 25% for anything above that. He’s also proposing a flat 15% corporate tax rate. He would eliminate the capital gains, dividends, interest and estate taxes.

Pretty expensive proposition so it’s got to be paid for, right? Pawlenty’s got a plan for that too:

To pay for the tax cuts, Pawlenty said he would eliminate unspecified tax loopholes and subsidies. “The Tax Code is littered with special interest handouts, carve-outs, subsidies and loopholes,” he said. “That should be eliminated.”

This is one of those instances where a reporter may ask the follow-up question, “Governor, which tax credits would you eliminate?” To which Pawlenty answers, “Yes.”

[via AT]

Accountant Reaches New Heights of Stupid Behavior After Drinking and Driving

Where I come from, some of my friends had a saying, “There’s only one way to drive drunk…FAST!” Obviously this is dumb. Forget the fact that drinking and driving is dumb but exceeding the speed limit while drinking and driving is exponentially dumber. Inevitably this type of behavior will get you pulled over, at which point the opportunity for more dumb behavior presents itself. On the one hand you could simply jump out of the car, flee the scene, losing your shirt in the process because it will probably slow you down, only to be tackled, cuffed and babbling the Branded theme song in the back of a police cruiser. Another option would be to literally manifest the phrase “cop-slugging drunk.” And yet another option is to do what Alison Brookes did and opt for a more affectionate approach:

A driver who kissed a cop in a bid to avoid a parking ticket ended up losing her licence – after he smelled booze on her breath. Chartered accountant Alison Brookes, 51, planted the smacker on the police officer’s cheek after he spotted her parked on double yellow lines in Didsbury. But the officer got a whiff of alcohol – and arrested her. Brookes, of Fenwick Drive, Heaton Mersey, admitted drink driving and was banned for 14 months at Manchester Magistrates’ Court. Court chairman Stephen Terry told her: “Perhaps kissing the officer was a bit of a giveaway, but that’s by the by.”

Have you been drinking madam? Accountant failed breath test after she gave traffic cop a kiss on the cheek [MEN]

McGladrey Announces Contest Where the Grand Prize Is Caddying for a Golfer That Isn’t Natalie Gulbis

The cakehole fillers at McGladrey announced a contest last week where the winner will caddy for Davis Love III at the McGladrey Classic Pro-am. All you have to do is submit “a creative photo and short essay explaining why you should be Davis’ caddie.”

Of course you’ll have to know DL3 inside-out and upside down, just like the folks at Mickey G’s [Someone who] understands my needs, my game, and my love and passion for the game of golf.” Right. Needs like making sure that there is a fresh pair of pants available for photos should Dave win the tournament, keeping John Daly’s hillbilly ass out of earshot and verifying that the McGladrey people put “Davis Love III” on the checks.

At Least Lenny Dykstra’s Accountant Managed to Avoid Drug Charges

The grand theft auto allegations stuck though.

Dykstra, 48, was charged with 25 misdemeanor and felony counts of grand theft auto, attempted grand theft auto, identity theft and other crimes, said Jane Robison, a spokeswoman for the Los Angeles County district attorney’s office. He faces up to 12 years in state prison if convicted.

His accountant and a friend were charged in connection with the alleged auto theft but not with drug crimes, Robison said.

Prosecutors contend that the three men tried to lease high-end cars from dealers this year by providing phony information and claiming credit through a phony business called Home Free Systems.

Two dealerships rejected the lease applications but a third allowed the men to drive off with three cars, according to a statement from the district attorney’s office.

Lenny Dykstra charged with drug possession, GTA [AP]

So You Think Your CPA Can Dance?

One thing I’ve always loved about the Maryland Association of CPAs is that they aren’t afraid to shake things up, do what everyone else isn’t doing and, uh, break out into a dance routine in the middle of a dinner reception.

Remember the “big surprise” they were planning for the 2011 CPA Summit? Here it is, enjoy:

CPAs Aren’t As Optimistic As They Used to Be on the Economy

Straight from the horse’s mouth, or, in this case, the CPAs:

According to the latest AICPA Economic Outlook Survey, chief financial officers, controllers and CPAs in executive and senior management accounting roles are far less optimistic now about the direction of the U.S. economy than they were in the first quarter of 2011.

The CPA Outlook Index, a broad-based composite index that captures the expectations of CPA financial executives and management accountants, declined three points to 66 this quarter, from 69 in the prior period.

“The flush of optimism we experienced earlier this year has given way to more moderate expectations for the U.S. economy,” said Carol Scott, AICPA vice president for business, industry and government. “While the CPA Outlook Index is still positive relative to the dark days of the recession, our members are concerned about rising energy costs and inflation, health care costs and continuing weakness in demand.”

The pullback in optimism follows an upbeat assessment in the prior quarter and signals the two-year-old U.S. economic recovery has lost momentum, Scott said. The survey shows that expectations for corporate expansion and hiring have moderated and the outlook for revenues and profits declined. Concerns about inflation continued to rise, driven by higher energy costs. The outlook for capital spending remained largely flat with information technology the only sector enjoying improvement.

It’s worth noting that while optimism for the US economy declined sharply this quarter, it is still higher than it was for the 4th quarter of 2010. Slightly more than one quarter of respondents (27%) expressed a pessimistic outlook for the US economy, driven by concerns about unemployment, government debt and rising prices.

Check out the full survey here, Valium not included.

Department of Justice Would Treat Goldman Sachs Slightly Better Than Arthur Andersen

That is, the DOJ wouldn’t indict Goldman on criminal charges like they did Andersen. Which, you may recall, didn’t turn out so well for A^2.

DealBook reports the musings of Sanford Bernstein analyst Brad Hintz:

If an alleged violation is identified during a Goldman investigation, we expect a reasoned response from the Justice Department. In a worst case environment, we would expect a “too big to fail” bank such as Goldman to be offered a Deferred Prosecution Agreement, pay a significant fine and submit to a Federal monitor in lieu of a criminal charge. Consequently, we do not believe that Goldman investors face an “Arthur Andersen” risk.

No ‘Arthur Andersen’ Risk to Goldman, Analyst Says [DealBook]

Study: Analysts Just as Illiterate as Investors When Reading Financial Reports

Convoluted corporate financial reports are just as unreadable for professional stock analysts as they are for the average investor, according to a new study.

The study, published in the current issue of the American Accounting Association journal Accounting Review, tested the readability of tens of thousands of company filings over 12 years and found that analysts’ earnings forecasts for firms with less readable reports “have greater dispersion, are less accurate, and are associated with greater overall analyst uncertainty.” Ironically, however, the syntactic and linguistic complexity of these reports generated greater demand from investors for analysts’ commentary and greater reliance on their forecasts. [AT]