Comments on: Overstock.com: Pretend accounting measures muddy the waters

By: Mike C

Mike C — Tue, 19 Feb 2008 19:10:01 +0000

I don’t agree on all points, but agree that the calculation of EBITDA does not follow the SEC guidelines that it should be reconciled to the GAAP financial statements by starting with net income.

By: Tracy Coenen

Tracy Coenen — Tue, 19 Feb 2008 18:22:56 +0000

Mike wrote:
“…as they should have.”

So you agree with me that Overstock is wrong. Good.

By: Mike C

Mike C — Tue, 19 Feb 2008 18:17:37 +0000

I was just pointing out that these are not SEC “rules” but rather guidelines or opinions. The formal rules related to non-GAAP disclosures only require that you reconcile your non-GAAP measure back to GAAP.

I agree that Overstock did not start with net income (net earnings) as they should have, but they can exclude fas123r stock comp (non-cash) when determining EBITDA as do most companies who present EBITDA where this is a significant non-cash number.

By: Tracy Coenen

Tracy Coenen — Tue, 19 Feb 2008 17:41:30 +0000

Common disclaimer language. Who would I believe? Patrick Byrne or the Division of Corporate Finance? The answer is simple.

By: Mike C

Mike C — Tue, 19 Feb 2008 16:54:28 +0000

You left out one important fact when quoting the SEC FAQ above regarding the use of EBIT and EBITDA –

“The answers to these frequently asked questions represent the views of the Division of Corporation Finance. They are not rules, regulations or statements of the Securities and Exchange Commission. Further, the Commission has neither approved nor disapproved them. “

By: Tracy Coenen

Tracy Coenen — Tue, 19 Feb 2008 15:43:06 +0000

While the auditor opinion does not specifically reference MD&A, auditors can and do examine supplementary information and financial statement details quarterly and yearly. They aren’t allowed to pretend that Overstock isn’t breaking the law, just because the misdeeds aren’t on the face of the financial statements.

By: Tracy Coenen

Tracy Coenen — Tue, 19 Feb 2008 15:41:32 +0000

Ah.. yes… what I call “The USANA Defense.” Everyone is breaking the law so we can too!!! If you don’t know what I mean, you can Google Gil Fuller, Usana’s CFO, and read all about how he called himself a CPA for years when he wasn’t licensed.

By: Mike C

Mike C — Tue, 19 Feb 2008 14:22:32 +0000

Show me an auditor opinion that mentions MD&A and I will back off of my statement.

The SEC is clear in their SOX guidance that MD&A is out of scope for SOX, primarily because the MD&A is not audited by external auditors.

By: Mike C

Mike C — Tue, 19 Feb 2008 14:18:30 +0000

I will clarify my comment – the auditors only provide an opinion on the financial statements and related footnotes. They may review the MD&A and other non-FS disclosures and provide input to management, but management is free to include in MD&A what they feel is relevant information to investors.

Google “adjusted EBITDA” and see how many hits you get. It is common practice for start-up companies and those suffering losses to report something that is slightly different that commonly-accepted EBITDA in an effort to explain cash flows within MD&A. Given the number of filers who do this, if it is illegal as you suggest, the SEC is not enforcing this very strictly. I am not condoning the use, only pointing out that Overstock is not the only company to report EBITDA that does not follow the normal definition.

By: Tracy Coenen

Tracy Coenen — Tue, 19 Feb 2008 09:01:59 +0000

Mike – You’re wrong on both accounts.

1. The auditors don’t just look at financial statements and notes.

2. The rules do NOT allow a company to make up a financial measure, give it a misleading name, but get away with it just because they disclose their made up methodology. It’s simply not allowed under the SEC rules.