More on the Overstock.com Accounting Shenanigans

Patrick Byrne Overstock Accounting IrregularitiesThis year, Patrick Byrne and company have taken a liking to discussing the Overstock.com (NASDAQ: OSTK) financials using non-GAAP measures. This means that they present certain financial figures that are not computed in accordance with GAAP (accounting rules).

Who cares? As long as they disclose that they’re non-GAAP measures, it doesn’t matter, right? Wrong. You see, companies use non-GAAP measures for one of two things:

  1. To provide additional information about operations and results to users of the financial statements. These disclosures are in addition to the usual disclosures under the accounting rules, and they often relate to unique attributes of an industry or company. They can provide more insight than just the standard financial statements.
  2. To take focus off poor financial results and instead focus on “other measures” that make things at a company look less bad.

In Overstock.com’s case, the company has never turned a profit and nothing about the company’s operations suggest that they ever will.

Byrne and company have taken to discussing these non-GAAP measures that appear to hide how poorly the company is doing on a consistent year-after-year basis.

Sam Antar goes into great detail about the use of the non-GAAP measures, and why he believes the measures used by Overstock.com have resulted in a violation of SEC rules, specifically Regulation G. Sam summarizes his blog post, Overstock.com and CEO Patrick Byrne: Improper use of EBITDA results in Regulation G Violation:

In this blog post, I examine Overstock.com’s presentation of another non-GAAP financial measure, known as “earnings before interest, taxes, depreciation, and amortization” or EBITDA. Based on my analysis below, it appears that Overstock.com violated Regulation G by reconciling its non-GAAP financial measure, EBITDA, to “Operating loss” rather than “Net loss,” contrary to the SEC’s guidance on Regulation G.

The result of Overstock.com reconciling EBITDA to “Operating loss” rather than “Net loss,” contrary to the SEC’s guidance on Regulation G, caused Overstock.com to overstate EBITDA by the at least the amount of “Loss from discontinued operations” for certain accounting periods presented in the second and third quarter 10-Qs for fiscal year 2007. In addition, certain stock-based compensation measures and “treasury stock issued to employees for compensation” were removed from Overstock.com’s EBITDA calculation causing added overstatements of EBITDA for certain accounting periods presented in the second and third quarter 10-Qs for fiscal year 2007.

The blog post does a great job of explaining Regulation G and why it’s not okay for companies to simply make up a measure and present it. There are guidelines that must be followed. In Overstock’s case, it sure looks like they’re trying to deflect attention away from the company’s inability to turn a profit.

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Comments (3)

  • Peter L.

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    Tracey,

    Can I ask whether your diligence on behalf of Overstock.com will be as well published as your diligence against Overstock.com appears today?

    While you appear fixated on the re-reportings of the rants of Sam Antar recognize, the SEC has yet to find fault with Overstock accounting despite all of Sam’s indications there is fault to be found. In fact, sam even presented his evidence to the SEC. If the SEC does not bring an enforcement against Overstock, will you apologize as easily as you accuse or can we expect a more shallow reponse?

    Clearly Sam is on a vendetta mission on behalf of someone – are you as well?

    Reply

  • Tracy Coenen

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    The wheels of justice move slowly, my friend. Whether the SEC acts or not isn’t the point. Because even if they choose not to act, it doesn’t mean that the shenanigans didn’t occur.

    And it’s not clear that Sam is “on a vendetta mission on behalf of someone,” because he’s not. He’s just interested in the company’s financial disclosures, as am I.

    Fortunately for us, we get a bonus! Byrne’s antics provide hours and hours of entertainment and excellent blog fodder.

    If the SEC comes forward and says that Overstock is squeaky clean, I will apologize for having a different opinion. :)

    Reply

  • Sam E. Antar

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    By Peter’s logic, Overstock.com and Patrick Byrne owe Gradient Analytics an apology. The SEC dropped the Gradient probe and issued them a no action letter. The SEC investigation of Overstock.com continues. Patrick Byrne has admitted to being the target of the SEC probe in contrast to his previous denials.

    Respectfully,

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

    Reply

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