Skip to main content

Overstock.com and CEO Patrick Byrne Violate Accounting Rules in Q4 2008 Financial Report

Latest GAAP Violations by Overstock.com in Q4 2008 Financial Report Improperly Turn a Loss into a Profit

Last Friday, Overstock.com (NASDAQ: OSTK) reported a fourth quarter 2008 net profit of $1 million dollars. CEO Patrick Byrne proudly told investors, "After a tough three years, returning to GAAP profitability is a relief." However, Overstock.com's "returning to GAAP profitability" was simply accomplished by the company violating GAAP through its failure to restate prior period financial reports effected by a certain accounting error. Had Overstock.com properly followed acounting rules, it would have reported an $800,000 loss instead of a $1 million profit.

During the Q4 2008 earnings call, the new Overstock.com CFO Steve Chesnut, who recently replaced David Chidester, 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.

According to Statement of Financial Accounting Standards No. 154 and SEC Staff Accounting Bulletin No. 99, Overstock.com should have restated all prior accounting periods, rather than use a "one-time gain" to correct its accounting errors "relating to payments from partners who were under-billed earlier in the year."

Under GAAP, we are required to use an accrual basis of accounting. Income is recognized when it is earned and not when it is later billed or when amounts are collected. The “one-time gain of $1.8 million relating to payments from partners who were under-billed earlier in the year” was earned before Q4 2008 and should have been recognized in prior periods. Since the accounting error is material under SAB No. 99, Overstock.com is required to restate prior period financial reports under SFAS No. 154 and cannot use a “one-time gain” to correct its error.

As a result of violating SFAS No. 154 and SAB No. 99, Overstock.com improperly reported a Q4 2008 net profit of $1 million, instead of an $800,000 net loss.

According to SFAS No. 154 paragraph 25:
Any error in the financial statements of a prior period discovered subsequent to their issuance shall be reported as a prior-period adjustment by restating the prior-period financial statements.
Note: Bold print and italics added by me.
Among the criteria that SAB No. 99 uses to define a material accounting error that requires a restatement of prior period financial reports are:
• whether the misstatement masks a change in earnings or other trends
• whether the misstatement hides a failure to meet analysts' consensus expectations for the enterprise
• whether the misstatement changes a loss into income or vice versa
Overstock.com’s accounting error met in all three materiality criteria above and the company should have restated its prior financial reports, rather than use a one-time gain to correct its accounting error in Q4 2008. See below.


Whether the material misstatement masks a change in earnings and other trends

Overstock.com has never reported a profitable year and has reported only three profitable quarters (Q4 2002, Q4 2004, and Q4 2008), since its inception. Prior to Q4 2008, Overstock.com’s last reported profitable quarter was four years earlier, in Q4 2004. If Overstock.com had properly restated its prior financial reports, rather than improperly report a one-time gain of $1.8 million from correcting its under-billing of fulfillment partners in prior periods, the company would have reported an $800,000 loss in Q4 2008, instead of a $1 million profit.

Therefore, Overstock.com clearly changed its trend of 15 consecutive reported quarterly losses by improperly using a one-time gain of $1.8 million to correct its accounting error in Q4 2008. The company’s treatment of its accounting error as a one-time gain “masks a change in earnings and other trends” and is considered a material accounting error under SAB No. 99. Therefore, Overstock.com should have restated its financial reports as required under SFAS No. 154.

Whether the misstatement hides a failure to meet analysts’ consensus expectations for the enterprise

The mean analysts’ consensus expectations for Overstock.com’s Q4 2008 financial results were negative $.03 earnings per share. Overstock.com reported $.04 positive earnings per share because of the $1.8 million one-time gain it improperly reported from correcting its under-billing of fulfillment partners in prior periods.

Without that $1.8 million one-time gain, Overstock.com’s earnings per share would have been reported at negative $.04 earnings per share, compared to analysts’ consensus expectations of negative $.03 earnings per share.

Therefore, Overstock.com’s accounting error was material under SAB No. 99, since it “hides a failure to meet analysts’ consensus expectations” and we have another reason why Overstock.com should have restated its financial reports as required under SFAS No. 154.


Whether a misstatement changes a loss into income or vice versa

As I detailed above, Overstock.com reported a Q4 2008 profit of $1 million instead of a loss of $800,000 because the company improperly used a one-time gain of $1.8 million to correct its under-billing of fulfillment partners in prior periods. Clearly, Overstock.com’s accounting error is material, since it changes a properly reported net loss into an improperly reported net profit.

Overstock.com’s more recent violations of Generally Accepted Accounting Principles (GAAP) and SEC rules should come as no surprise readers of my blog. What should be surprising is the SEC’s failure to take enforcement action against the company and its management.

Written by,

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


Disclosure:

I am not long or short Overstock.com securities.

Comments

Popular Posts

Did a Clever SEC Bait Goldman Sachs into Compounding Its Legal Problems With the "Kiss of Death" Message?

Updated: At 3:48 AM ET 04/20/2010 on bottom

The Kiss of Death

In filing its lawsuit against Goldman Sachs (NYSE: GS) on a Friday, the Securities and Exchange Commission sent what I call the "kiss of death" message to the embattled company. In other words, the SEC wanted to stick it to Goldman Sachs and Fabrice Tourre, the Executive Director of Goldman Sachs International, who is also a defendant in the complaint. While the SEC as a practice does inform target companies and individuals of an impending enforcement action, it does not always tell them exactly when such an action will be filed.

Apparently, the SEC filed its lawsuit without giving Goldman Sachs the heads up that it was planning to file it that day. Business Insider observed that Goldman Sachs was clearly unprepared to respond to the complaint as news of the lawsuit dominated the headlines all day. Goldman issued a short denial around noon and issued an extensive denial late in the afternoon, after most people had …

Overstock.com CEO Patrick Byrne Sleeps With a Gun

Suggested Reading: Overstock.com Hatchet Man Judd Bagley's Downward Spiral: Junkie, Confessed Criminal, Admitted Adulterer by Sam Antar (here), and Closing the File on a Criminal and Junkie Named Judd Bagley by Gary Weiss (here)

In numerous blog posts in the past, and in widespread media coverage, evidence has accumulated for years that Overstock.com CEO (NASDAQ: OSTK) Patrick Byrne has shown signs of being mentally unbalanced and paranoid.

Byrne has blamed his company's financial woes on an unnamed "Sith Lord." He hired paid goons to stalk his real and imagined adversaries and to write lengthy conspiracy theories on the Internet. Byrne has close ties with Bo Gritz. The Anti-Defamation League lists Bo Gritz as a far-right extremist with “extensive connections to both white supremacists and anti-government groups and leaders.”

Patrick Byrne's infamous temper tantrums when he doesn’t get want he wants are well documented too. He made obscene and misogynistic commen…

Nature's Sunshine Products, Willbros Group, Cal Dive International, and BSQUARE Violate S.E.C. Rules on Calculating EBITDA

Nature’s Sunshine Products (NASDAQ: NATR), Willbros Group (NYSE: WG), Cal Dive International (NYSE: DVR), and BSQUARE (NASDAQ: BSQR) have recently issued earnings reports which include a calculation of EBITDA (earnings before interest, taxes, depreciation, and amortization) that apparently does not comply with Securities and Exchange Commission interpretations for Regulation G governing such non-GAAP financial measures. In each case, their erroneous EBITDA calculations have enabled them to significantly distort their financial performance by erroneously reporting a positive EBITDA, when they should have reported a negative EBITDA in the latest quarter.

How EBITDA is supposed to be calculated under Regulation G

According to the S.E.C. Compliance & Disclosure Interpretations, EBITDA is defined under Regulation G as net income (not operating income) before net interest, taxes, depreciation, and amortization. See below:

Question 103.01Question: Exchange Act Release No. 47226 describes E…

InterOil, John Thomas Financial, and Clarion Finanz: Anatomy of a Stock Market Manipulation Scheme

In this blog post, I will provide evidence of what I believe is a stock market manipulation scheme involving InterOil (NYSE: IOC), John Thomas Financial, and Clarion Finanz AG. I believe that InterOil with the assistance of Clarion Finanz concealed John Thomas Financial’s involvement in helping it raise $95 million through a private placement of convertible debt securities.

Clarion Finanz acted as a buffer between InterOil and John Thomas Financial to help InterOil hide John Thomas Financial's role in raising funds. Afterwards, InterOil filed false and misleading reports with the Securities and Exchange Commission in an effort to conceal John Thomas Financial’s role in helping the company raise $95 million in convertible debt.

Carl Caserta, who in 1991 was barred by the Securities and Exchange Commission from “association with any broker, dealer, or investment advisor” played a role in helping InterOil use John Thomas Financial to obtain funds from investors. InterOil, John Thoma…

Class Action Complaint against Amedisys uses Sarbanes-Oxley Act Corporate Governance Provisions to Battle Alleged Corporate Malfeasance

Updated at bottom of article

Last week, Pomerantz Haudek Grossman & Gross LLP filed a class action lawsuit against Amedisys (NASDAQ: AMED) charging the company, its CEO William F. Borne and its CFO Dale E. Redman with securities fraud.  In the next few days, Bernstein Liebhard LLP and Finkelstein Thompson LLP filed similar class action lawsuits against the company. The lawsuits allege that Amedisys abused Medicare's reimbursement system for at-home therapy care based on a compelling analysis of company revenues in an April 27 Wall Street Journal article.

In addition, the lawsuits innovatively utilize a provision under Section 406 of the Sarbanes-Oxley Act 2002 which provides a back-door way for investors to force ethical corporate governance and sue public companies for malfeasance. That provision requires Senior Financial Officers, such as the CEO and CFO of public companies, to abide by a strict code of ethics which broadly defines corporate malfeasance and effectively makes…