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Open Letter to the Securities and Exchange Commission (Part 6): Conflicting Disclosures by Reveal Improper Audit Opinion Shopping

Open Letter to the Securities and Exchange Commission:

After carefully examining certain conflicting and contradictory disclosures by (NASDAQ: OSTK), I recommend that you should also investigate whether the company engaged in improper audit “opinion shopping” in hiring both Grant Thornton, who replaced PricewaterhouseCoopers (PWC) as the company's auditors and KMPG, who replaced Grant Thornton after they were fired by the company.

Brief Background

In October 2008, restated its financial reports from Q1 2003 to Q2 2008 due to customer refund and credit errors. However, the October 2008 restatement did not include corrections arising from underbilled offsetting costs and reimbursements that were already earned from its fulfillment partners during those same corresponding periods, less a reasonable estimate of uncollectable amounts. In other words, should have gone back and corrected or restated its financial reports to reflect income already earned from offsetting costs and reimbursements due from its fulfillment partners, less a reasonable estimate for uncollectable amounts.

Instead, violated Generally Accepted Accounting Principles (GAAP) and improperly deferred income that it earned but underbilled its fulfillment partners during prior reporting periods (Q3 2008 and before) by moving such income to future reporting periods (Q4 2008, Q1 2009, Q2 2009, and Q3 2009). In effect, improperly created a "cookie jar reserve" to materially inflate future earnings or reduce future losses (Details here).

In February 2009, I wrote two blog posts (details here and here) about’s improper establishment of an improper "cookie jar reserve" and I immediately contacted both the company and the SEC. Since both and the SEC were parties to those emails, the company was fully aware that I was communicating with the SEC.

In March 2009, fired PricewaterhouseCoopers as its auditors and hired Grant Thornton to replace them.

In September 2009, the SEC Enforcement Division re-opened a previously closed investigation of's financial reporting irregularities and a few weeks later, the SEC Division of Corporation Finance started a similar probe.

SEC Division of Corporation Finance discovers previously undisclosed overpayment error

In responding to questions from the SEC Division of Corporation Finance, disclosed that in February 2009 the company learned it overpaid a fulfillment partner $785,000 during 2008. The company recovered the overpayment in Q1 2009 and improperly reported the overpayment recovery as income in that same quarter, rather than properly restate its 2008 financial reports to correct that error. In addition, improperly concealed the recovery of the overpayment by including that amount in recoveries from underbilled fulfillment partners in Q1 2009 instead of separately disclosing the overpayment recovery in its financial reports.

Grant Thornton claimed that it did not know about the 2008 overpayment and Q1 2009 recovery from the fulfillment partner until October 2009. After learning about the overpayment, Grant Thornton told that it must restate its prior financial reports to correct that error and comply with GAAP. On November 13, 2009, fired Grant Thornton, rather than restate its financial reports and later filed an "unreviewed" Q3 2009 10-Q that finally disclosed the overpayment to the fulfillment partner. (See details here). disputes Grant Thornton by apparently claiming that it shopped for its audit opinion before hiring them as their auditors claims that Grant Thornton knew about the 2008 overpayment and Q1 2009 recovery from the fulfillment partner before they hired. claimed that Grant Thornton provided "guidance on the accounting for the $785,000 fulfillment partner overpayment" and was "comfortable" with the company's "past accounting practices."

If's story is to be believed, than the company is apparently admitting to improper audit "opinion shopping" since it was concerned about hiring a new auditor who did not agree with its accounting treatment of recoveries from underbilled and overpaid fulfillment partners. At the time hired Grant Thornton, the company already knew that I was communicating directly with the SEC about its financial reporting violations since they were a party to such emails and sent me "read receipts" acknowledging that they read the emails. Therefore, was concerned about the issues I raised with the SEC when it decided to hire Grant Thornton as the company's new auditors.

Below, I will detail conflicting disclosures by about its hiring and firing of Grant Thornton and its hiring of KPMG to replace Grant Thornton. I will describe how if earlier disclosures by the are truthful, than later disclosures by the company cannot be truthful or if later disclosures are truthful, than earlier disclosures cannot be truthful.’s 8-K disclosure about hiring Grant Thornton to replace PricewaterhouseCoopers as its auditors

When hired Grant Thornton, the company made the following 8-K/A disclosure:

Also on March 23, 2009, the Audit Committee selected and engaged Grant Thornton LLP as the Company’s independent registered public accounting firm as its auditor of record for the fiscal year ending December 31, 2009. This selection is the result of a competitive bid process. During the Company’s two most recent fiscal years ended December 31, 2008 and 2007 and through March 23, 2009, neither the Company nor anyone on its behalf consulted Grant Thornton LLP regarding either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s financial statements, and no written report or oral advice was provided to the Company that Grant Thornton LLP concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue; or (ii) any matter that was the subject of a disagreement or reportable event as defined in Regulation S-K, Item 304(a)(1)(iv) and Item 304(a)(1)(v), respectively.

Note: Bold print and italics added by me:

In other words, originally claimed that it never consulted Grant Thornton prior to hiring them about "application of accounting principles to a specified transaction, either completed or proposed" or, in particular, the company's accounting treatment for recoveries from underbilled or overpaid fulfillment partners.

Later disclosures by after the company fired Grant Thornton conflict with the company’s original disclosure about its hiring of Grant Thornton as detailed above

If the original disclosure by is truthful, then later disclosures by the company cannot be truthful. As I will describe in more detail below, it turns out that later claimed that before Grant Thornton was hired by the company, they "provided guidance on the accounting for the $785,000 fulfillment partner overpayment" and was "comfortable" with the company's "past accounting practices." In other words, claimed that Grant Thornton was consulted about "the application of accounting principles to a specified transaction, either completed or proposed" before it was hired, contrary to the company's previous disclosures.

On November 13, 2009, fired Grant Thornton after they recommended that the company's prior financial reports should be restated to correct the overbilling error. Grant Thornton properly concluded that the Q1 2009 recovery of a 2008 overpayment to a fulfillment partner materially overstated's financial performance in 2009 by improperly shifting income from 2008 to 2009. claimed that Grant Thornton changed its position on the company’s accounting for the overpayment recovery from the fulfillment partner.

The company made the following disclosure in its 8-K report (paragraph 6):

On several occasions Grant Thornton discussed with and provided guidance on the accounting for the $785,000 fulfillment partner overpayment during and prior to October in the following respects:

a. The accounting for this transaction required significant judgment and interpretation of the facts and circumstances — which others with 20/20 hindsight might later question. Weighing all the facts and circumstances at the time, we decided it would be a mistake to book this overpayment as an asset as of December 31, 2008, deciding instead to recognize the sums as we recovered the money (that is, we thought the conservative position was the correct position). Our auditors at the time, PricewaterhouseCoopers (“PwC”), agreed with this course of action, and we prepared our 2008 Form 10-K on the basis of this decision.

b. Although PwC had given us eight years of fine service, after we filed our 2008 Form 10-K, we ran a formal RFP process for selecting our 2009 auditors as a reflection of my belief that changing auditors every decade or so might be healthy. Grant Thornton won that RFP, and the Audit Committee selected Grant Thornton as our 2009 auditor.

c. Before Grant Thornton took our audit engagement in Q1 2009, it reviewed our filed 2008 Form 10-K and told us it was comfortable with our past accounting practices.

Note: Bold print and italics added by me.

During a November 18, 2009 conference call, Jonathan Johnson reiterated the company's claim in its 8-K:

We wound up -- our Audit Committee wound up engaging Grant Thornton.

Prior to the engagement, Grant Thornton reviewed our 2008 10-K; told us that they were comfortable -- comfortable with the accounting.

Note: Bold print and italics added by me.’s original 8-K disclosure about its hiring of Grant Thornton claimed that the company had not "…consulted Grant Thornton LLP regarding…the application of accounting principles to a specified transaction, either completed or proposed" before Grant Thornton was hired. However, that disclosure cannot be true if we believe's later disclosure that Grant Thornton "provided guidance on the accounting for the $785,000 fulfillment partner overpayment" and was "comfortable" with the company's "past accounting practices."

It is not unusual for Grant Thornton to review financial disclosures prior to its audit engagement. Such information is used to help prospective auditors determine if they should accept an engagement and not to render an opinion to prospective audit clients about their disclosures (especially accounting irregularities) prior to being hired by them for such a purpose. If Grant Thornton did give an opinion about such disclosures before they were hired, than the company had in fact "consulted" with Grant Thornton and it should have been disclosed.

If Grant Thornton had advised that it was uncomfortable with the company's financial disclosures, it is doubtful that the company would have hired them as their auditors based on the company’s later conduct. Grant Thornton appropriately recommended that restate its 2009 financial reports because an accounting error originating in 2008 materially overstated the company's financial performance in Q1 2009. Instead, fired Grant Thornton, rather than restate its financial reports to comply with GAAP. The company took the unusual step of filing an unreviewed Q3 2009 10-Q report with the SEC.

Apparently, felt screwed when it claimed that Grant Thornton changed its position on the company's prior accounting treatment of its recovery from the overpaid fulfillment partner and fired them as their auditors. During the November 18, 2009 conference call, an embittered Patrick Byrne expressed his utter contempt for Grant Thornton saying:

I am dissing [is people on the scene] -- I mean, I think Grant Thornton -- we're not going to be exchanging Christmas cards.’s later claim that Grant Thornton was “comfortable” with the company’s “past accounting practices” was in fact an "important factor considered by the Company in reaching a decision as to the accounting, auditing or financial reporting issue" since it continued to recognize recoveries from underbilled or overpaid fulfillment partners as income when they were received.

By its own definition, shops for an audit opinion by hiring KPMG

On December 28, 2009 hired KPMG as its auditors to replace Grant Thornton, despite previous assurances by CEO Patrick M. Byrne and company President Jonathan E. Johnson that they would not hire new auditors until after the SEC Division of Corporation Finance completed its review of certain financial reporting irregularities. See quotes from the November 18, 2009 conference call transcript below:

Willis Taylor - Gagnon Securities - Analyst

Since you've dismissed your auditor for a very specific accounting choice, when you go to select a new auditor, how do you prevent yourself from being accused of opinion shopping?

Jonathan Johnson - - President

That's a great question, Louis, and that's part of the reason that we've decided not to select a new auditor until this -- until we resolve this issue with the SEC.

We do not want to be accused of opinion shopping. We'd like the SEC to help us figure out -- we'd like them to say we've done it the right way or we've done it the wrong way. Once they say one of those two, we don't need to opinion shop.

Patrick Byrne - - Chairman and CEO

But, so, I would even say to the point that when people have contacted us, we have discouraged any communication on the grounds that we got -- for just that reason -- well, I have the -- no matter who we talk to now, then whoever we ultimately pick, people are going to say, well, you did this because you opinion shop.

So we're really not having discussions with anybody. It's nice to get phone calls, but we're not talking to anybody until we get through this just to prevent -- just as a prophylactic measure.

Thank you, Willis. Did you have another question?

In other words, did exactly what it said it would not do. By Jonathan Johnson's own definition, the company engaged in audit "opinion shopping." As I detailed above, Jonathan Johnson said, "... we've decided not to select a new auditor until this -- until we resolve this issue with the SEC. We do not want to be accused of opinion shopping." selected KPMG as its new auditor and did not wait until it resolved its issues with the SEC as Johnson said the company would do during the conference call.


Sam E. Antar

My previous open letters to the SEC (please note that each letter is based on's deliberately vague, incoherent, and inconsistent, and often contradictory disclosures at the time each one was issued):

08/05/09: Open Letter to the Securities and Exchange Commission: Stop GAAP Violations Now!

11/22/09: Open Letter to the Securities and Exchange Commission Part 2: New Information on's GAAP and SEC Disclosure Violations

11/23/09: Open Letter to the Securities and Exchange Commission Part 3: Lied About Grant Thornton and Concealed Error

11/26/09: Open Letter to the Securities and Exchange Commission Part 4: Patrick Byrne Ignores Real Issues As He Vilifies Grant Thornton

12/14/09: Open Letter to the Securities and Exchange Commission Part 5: Issuer Retaliation Complaint Against


I am a convicted felon and a former CPA. As the criminal CFO of Crazy Eddie, I helped Eddie Antar and other members of his family mastermind one of the largest securities frauds uncovered during the 1980's. I committed my crimes, simply because I could.

If it weren't for the efforts of the FBI, SEC, Postal Inspector's Office, US Attorney's Office, and class action plaintiff's lawyers who investigated, prosecuted, and sued me, I would still be the criminal CFO of Crazy Eddie today.

I do not own securities short or long. My research on and in particular its lying CEO Patrick Byrne is a freebie for securities regulators and the public in order to help me get into heaven, though I doubt that I will ever get there anyway. I will probably end up joining corporate miscreants such as Patrick Byrne in hell. In any case, exposing corporate crooks is a lot of fun for a forcibly "retired" crook like me and analyzing's financial reporting is a forensic accountant's wet dream.

KPMG's predecessor firms Main Hurdman and Peat Marwick Main were Crazy Eddie's auditors. KPMG has sponsored at least two of my free speaking engagements to colleges and universities.


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