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Can We Trust’s Financial Reporting?

In's (NASDAQ: BIDZ) recent 2009 10-K and Q1 2010 10-Q reports, the company reported "material weaknesses in internal controls over financial reporting." Among the many weaknesses in internal controls cited by was "control deficiencies related... (iii) maintaining an effective control environment over management oversight and anti-fraud controls specifically in processing of financial transactions, vendor review and payment processing." However, management "concluded" its financial reports "are fairly stated in all material respects in accordance with generally accepted accounting principles in the United States."

In other words, cannot effectively prevent anyone from robbing the company blind and cannot prevent material errors in paying its vendors. Yet, the company wants you to believe that its financial reports contain no material errors and comply with GAAP. Should we trust's numbers?

My personal opinion is to be very skeptical of's financial reporting because of such material weakness in internal controls, an SEC investigation of possible GAAP violations, and continuing auditor quality issues.

Possible GAAP Violations under Investigation by the Securities and Exchange Commission

Starting in March 2008, this blog detailed possible GAAP violations in inventory reporting and I notified the Securities and Exchange Commission of my concerns (Details here, here, and here). On February 23, 2009, the SEC responded to my reports and started investigating's inventory reporting. On October 27, 2009, the SEC expanded its investigation of to include "the Company’s co-op marketing contributions and minimum gross profit guarantees."

Auditor Quality Issues claims that its auditors, Stonefield Josephson, performed "expanded procedures" to ensure that its financial reports are free from material accounting errors. However, sample audit inspections conducted by the Public Company Accounting Oversight Board (PCAOB) show a high pattern of significant deficiencies in audits conducted by Stonefield Josephson. Those deficiencies related to their failure to obtain "sufficient competent evidential matter to support its opinion on the issuer's financial statements."

According to a March 2007 PCAOB inspection report, Stonefield Josephson, Inc. was cited for significant deficiencies in five of thirteen audits reviewed or about 38.5% of audits sampled by them. According to the PCAOB report:
The deficiencies identified in five of the audits reviewed included deficiencies of such significance that it appeared to the inspection team that the Firm did not obtain sufficient competent evidential matter to support its opinion on the issuer's financial statements.
In October 2009, the PCAOB issued another inspection report citing Stonefield Josephson for significant deficiencies in a smaller sample of one of four audits reviewed or about 25% of audits sampled by them. Again, the SEC noted that the "Firm did not obtain sufficient competent evidential matter to support its opinion on the issuer's financial statements." So far six of seventeen Stonefield Josephson audits or about 35% of audits inspected by the PCAOB over the last several years reveal significant deficiencies.

A few months earlier, in June 2009, I recommended that consider replacing Stonefield Josephson as its auditors. However, recently recommended keeping Stonefield Josephson as its auditors for fiscal year 2010.

Closing comments

Another company plagued by internal control problems is (NASDAQ: OSTK). They had to restate their financial reports for the third time in three years due to deliberate GAAP violations exposed in this blog and reported to the SEC.

Public accounting firms are delusional if they think they can conduct a proper audit in the absence of adequate internal controls. Lax internal controls make it very easy for management and employees to commit fraud and acknowledges that it cannot prevent material fraud due to its weaknesses in internal controls.

Expanded audit procedures did not work for Crazy Eddie's auditors back in the day or for PricewaterhouseCoopers,'s former auditors. Such expanded audit procedures do relatively little to reduce risk of material misstatements of financial reports since auditors cannot be in all places at all times during the accounting cycle.

Written by:

Sam E. Antar

Recommended Reading

Going Concern - Accounting News Roundup:’s Financial Reporting Could Have Some Issues; Tax Planning Stays One Step Ahead Financial Reform; Accountant Denied Bail in Terror Case by Caleb Newquist

Economic Policy Journal - Shia Labeouf SEC Investigation? by Robert Wenzel

Gary Weiss - Reporter's Stalkers Aped Hood Judd Bagley


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 for fun and profit and 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 or securities short or long. My research on and 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 because my sins are unforgivable.

In any case, there are certain naughty elements within the SEC who reward whistleblower freebies by biting the hand that feeds them. It seems that no good deed goes unpunished by the SEC as the regulator continues to allow many corporate scammers to go unpunished, too. That issue may be the subject of a future blog post.


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