Monday, February 09, 2009

Overstock.com Refuses to Correct GAAP Violations in Latest Financial Report

So far, Overstock.com (NASDAQ: OSTK) has stubbornly refused to correct recent Q4 2008 GAAP violations, exposed last week by this blog that allowed the company to improperly report a $1 million profit, rather than an $800,000 net loss. Instead on last Friday, Overstock.com CEO Patrick Byrne was caught trying to make excuses to readers on a stock bulletin board, using an alias in an unsigned post. After I complained in emails to the company and the Securities and Exchange Commission, Byrne removed his unsigned post and posted the same nonsense with his real name attached to it. I'll have more to say on that, later.

Overstock.com violated accounting rules to report first quarterly profit after 15 consecutive quarterly losses

In my last blog post, I documented how Overstock.com violated Statement of Financial Accounting Standards No. 154 governing accounting errors and improperly reported a $1 million profit in Q4 2008, rather than an $800,000 net loss. During the Q4 2008 earnings call, new CFO Steven Chesnut, told investors:

Gross profit dollars were $43.6 million, a 6% decrease. This included a one-time gain of $1.8 million relating to payments from partners who were under-billed earlier in the year.

Note: Bold print and italics added by me.

That "one-time gain of $1.8 million" referred to above by CFO Steve Chesnut was actually an improper one-time cumulative adjustment of an accounting error. Overstock.com "under-billed" partners earlier in the year and that is simply an accounting error covered by SFAS No. 154.

To compound the problem, Overstock.com recognized the "one-time of $1.8 million" using cash-basis accounting when it "received payments from partners who were under-billed earlier in the year" instead of accrual basis accounting, which requires income to be recognized when earned. A public company is not permitted to correct any accounting error using cash-basis accounting.

If an accounting error is material, like in the case of Overstock.com detailed here, a company must restate all effected prior period financial reports, rather than use a one-time cumulative adjustment to correct such an error.

Overstock.com’s accounting error met at least three materiality criteria under SEC Staff Accounting Bulletin No. 99, governing the materiality of accounting errors. The accounting error only had to meet one materiality criteria to require a restatement of all effected prior period financial reports. See below:

(1) Whether the misstatement masks a change in earnings or other trends

(2) Whether the misstatement hides a failure to meet analysts' consensus expectations for the enterprise

(3) Whether the misstatement changes a loss into income or vice versa

Prior to Q4 2008, Overstock.com reported 15 consecutive quarterly losses and the mean analysts’ consensus expectations for Overstock.com’s Q4 2008 financial results were negative $.03 earnings per share. If Overstock.com had properly restated its prior period financial reports, rather than improperly report a one-time gain of $1.8 million from correcting its accounting error due to under-billing fulfillment partners in prior periods, the company would have reported an $800,000 loss in Q4 2008, instead of a $1 million profit.

By improperly using a "one-time gain" to correct its accounting error, Overstock.com's:

(1) Misstatement changed its trend of 15 consecutive quarterly losses to improperly report a Q4 2008 net profit $1 million, instead of properly reporting an $800,000 net loss;

(2) Misstatement hid a failure to meet analysts' consensus expectations of negative $.03 earnings per share by improperly reporting positive $.04 earnings per share, instead of properly reporting negative $.04 per share;

(3) Misstatement allowed the company to improperly report a $1 million profit, rather than a properly reported $800,000 net loss.

Patrick Byrne double-talks investors on an internet chat board

In trying to double-talk his way out of Overstock.com's latest financial reporting fiasco, Patrick Byrne started out with his usual personal attack on me, violated the company's Code of Business Conduct and Ethics, and possibly Regulation FD, as he tried to con readers of a stock bulletin board into believing that the company did not violate accounting rules:

Antar's ramblings are gibberish. Show them to any accountant and they will confirm. He has no clue what he is talking about.

For example: when one discovers that one underpaid some suppliers $1 million and overpaid others $1 million. For those whom one underpaid, one immediately recognizes a $1 million liability, and cleans it up by paying. For those one overpaid, one does not immediately book an asset of a $1 million receivable: instead, one books that as the monies flow in. Simple conservatism demands this (If we went to book the asset the moment we found it, how much should we book? The whole $1 million? An estimate of the portion of it we think we'll be able to collect?) The result is asymmetric treatment. Yet Antar is screaming his head off about this, while never once addressing this simple principle. Of course, if we had booked the found asset the moment we found it, he would have screamed his head off about that. Behind everything this guy writes, there is a gross obfuscation like this. His purpose is just to get as much noise out there as he can.

Note: Bold print and italics added by me.

Nowhere in Patrick Byrne's comment above does he mention the issue of the proper treatment of accounting errors under GAAP and SEC rules, as I have documented in my blog. Byrne can't address it. No matter what boloney Byrne said above, Overstock.com simply had a material accounting error that required the restatement of effected prior period financial reports.

Instead, Patrick Byrne, like a white collar criminal caught in the act of violating GAAP in SEC reports, tried to make excuses for Overstock.com's decision to correct its accounting errors by claiming that "conservatism demands" waiting until "monies flow in" from under-billed fulfillment partners, after such an error is discovered by the company. That is improper cash-basis accounting for a public company and does not address the restatement issue. In any case, Overstock.com is required to restate all prior period financial reports affected by its accounting error.

Patrick Byrne went on to make up new lies in an effort to discredit my exposure of Overstock.com's GAAP and SEC reporting violations:

In the last quarter he ignores a $4 million write-down. He says that we dispensed with a $3 million bonus for executives when it was really just $1 million. Etc. etc. It's just a guy on a street corner, spouting gibberish, hoping someone will toss him a quarter.

I did not write about Overstock.com's "$4 million write-down" relating to a note receivable because it is irrelevant to the company's violation of GAAP concerning accounting errors. In addition, I never wrote about any bonuses for Overstock.com executives, anywhere, despite Byrne's claim that I wrote about it. Patrick Byrne is simply making it up.

Patrick Byrne retaliates by employing paid shill Mark Mitchell to smear me

In another effort to discredit me, Patrick Byrne and his paid shill, washed up former Columbia Journalism Review (CJR) reporter Mark R. Mitchell, falsely claim that I am connected to the Genovese crime family and:

Now he is paid by short sellers with ties to David Rocker and associates of Michael Milken. The assignment to which he devotes the majority of his time is to use the Internet to harass and smear the reputations of Deep Capture founder Patrick Byrne and his colleagues.

That is untrue. I do not receive consideration of any kind, directly or indirectly, for examining Overstock's financial reporting, and publicly offering my observations regarding this firm. No one has ever paid me or promised to pay me any compensation in return for writing about Overstock.com, Patrick Byrne, and his colleagues. I am simply exposing Patrick Byrne's frauds on investors and his vicious retaliation against critics through paid shills like Mark Mitchell, Judd Bagley, and others who are enabling and abetting Byrne's frauds and abuses.

About two years ago, Mark Mitchell left CJR under a cloud after information surfaced that he violated its journalistic standards. Sources claim that Mitchell was escorted out of the building. I once asked Mark Mitchell about that alleged episode and he responded on the Yahoo Overstock.com message board saying, “I'm [meaning Mark Mitchell] a drug fiend and a psychopath and I've been escorted out of lots of places (pretty much everywhere I go, actually)." After realizing his folly, Mitchell deleted his Yahoo post and tried to deny being escorted out of the building. Like Byrne, Mitchell seems to be missing a few marbles, to say the least.

Overstock.com's Q4 2008 financial report is not reliable due GAAP violations

Overstock.com's Q4 2008 financial report cannot be relied on as a result of the company's failure to comply with SFAS No. 154 and SAB No. 99 governing accounting errors.

Last Wednesday, I emailed Joseph J. Tabacco Jr. and the Securities and Exchange Commission Utah Office to alert them of Overstock.com's latest violation of GAAP and SEC rules. According to SEC rules (See Items B-1 and 4.02), Overstock.com has until today to come clean and disclose that its Q4 2008 financial reports are not reliable. Don't count on it, unless the SEC takes action.

It took Overstock.com about a year to correct its violations of SEC Regulation G, after this blog exposed how the company used a non-compliant EBITDA measure to materially overstate its financial performance.

Until Overstock.com finally revised its EBITDA measure, CEO Patrick Byrne, company President Jonathan E. Johnson, and former CFO David Chidester all lied to investors claiming that Overstock.com was in compliance with SEC Regulation G, when it wasn't.

At that time, Byrne claimed that I was writing gibberish, too. He was proven wrong, when Overstock.com ate crow and finally revised its non-compliant EBITDA measure in its Q3 2008 10-Q report.

To be continued....

Written by,

Sam E. Antar (former Crazy Eddie CFO and a convicted felon)

Disclosure:

I have am not long or short Overstock.com securities.

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