Groupon Inc (NASDAQ: GRPN) announced a material weakness in its accounting policies. It tried to assuage investors that the real numbers like cash flow and real profits are still the same. Also the critical guidance was going to stay the same so hang on investors stay with the cause. Personally I have to disclose to you that I originally signed up for Groupon deals identifying myself as a solvent white educated male in my very late 50’s interested in fine dining, wines, scotch, cigars and very cool stuff for my grand-daughter. I received a slew of offers for nail extensions and nothing for my grand-daughter. Nothing I tell you. So I have been dubious about the underlying business case as it did not work for me.
So when I learn that this high flier has a serious problem with its accounting controls somehow I’m not surprised. What is surprising is managements expectations that this can be shrugged off. They claim to be working with another global accountancy to establish the correct policies. The claim says they have been working on the issue for several months. Ahem investors look at this point. If the new boy accountancy has been hired several months ago it means Reg FD has been violated. Groupon management knew about the problem but did not want to disclose or failed to disclose. Governance Governance Governance.
The smoking gun will be the terms and reference of the engagement agreement between Groupon and the third-party accountancy. They must have been hired to fix the problem because that’s what the updated guidance said they were hired to do. Do you think Groupon’s legal department see’s it that way? Why did they sign off on the press release and let them walk into the REG FD buzz saw? Do they understand Reg FD and securities litigation? Many class action lawsuits have been announced so maybe not. At this point there are seventeen announced actions so maybe the legal side is catching on.
I just find it very odd that they chose not to name the third-party accountancy firm that is investigating the material weakness. What could the damage be? Ernst and Young will do the audit. But given the responsibility that auditors now have what are the odds that Ernst and Young are reaching for their pen to sign off on the numbers.
We may have an interesting discussion about materiality. It’s only some $35 million that’s nothing for a fast growing company with rapacious shareholders. But to someone like a Google (Nasdaq:GOOG) or a Facebook (FB) who have an end game mentality a $35 million anomaly which depresses the price just might be the best piece of news their boards have heard in a long time.
George Gutowski writes from a caveat emptor perspective.
- UH-OH: The SEC Is Looking Closely At Groupon, Says Report (GRPN) (businessinsider.com)
- SEC Hit Groupon (247wallst.com)
- Groupon Is Having Trouble With the New Math (dailyfinance.com)
- Groupon’s Accounting Issues Are Worse Than You Think (fool.com)
- Groupon Is Having Trouble With the New Math (fool.com)
- Time to Fire Groupon’s CFO (247wallst.com)
- Groupon’s Stock Tanking and Lawyers Circling After Issuing Correction (allthingsd.com)