GAAP Being Replaced By BOSS

It’s official. The Sith Lord and I have concluded our meeting, and public companies in the United States will no longer be required to follow GAAP (Generally Accepted Accounting Principles). Instead, they will immediately begin following BOSS (Because Overstock Said So).

Many of you are not surprised by this change. With Patrick Byrne’s impressive ability to manipulate the accounting rules for the benefit of his company, Overstock.com (NASDAQ:OSTK), it only makes sense that we reward him by allowing him to make the accounting rules going forward. (He makes his own rules anyway, so what’s the difference?)

Monday, Sam Antar revealed that Overstock manipulated the figures in its most recent earnings release to make it look like the company’s revenue improved more than it really did. In the earnings release, Overstock compared 2008 revenue (calculated on a GAAP basis), to 2007 revenue (calculated on a non-GAAP basis). Essentially, the company compared two numbers that really aren’t comparable because they’re calculated different ways.

Far be it for management to admit the manipulation. Instead, Jonathan Johnson, senior vice president of legal at Overstock.com lied and said that both numbers were on a GAAP basis. They weren’t, period.

And here’s what was said about the issue during yesterday’s conference call:

David Chidester

Yeah, and again I would just clarify that the Q1’07 revenue and Q1’08 revenue are comparable because again the only effect to that Q1 of ’07 had no deferral or reversal. Q1’08 had a deferral and a reversal that [netted 41st 0:51] $900,000 difference. So the two are completely comparable.

Shawn Milne – Oppenheimer

Well, can’t you say it couldn’t be stickler? Couldn’t you say there was a $900,000 benefit in Q1 from this accounting change?

David Chidester

That you can, that’s exactly what happened.

Shawn Milne – Oppenheimer

So it’s less than 0.5% of revenue came from that. So it’s apples to Apples-to-Macintosh Apple’s.

David Chidester

And again we went back and analyzed all those previous quarters and made sure that there was no material difference between the estimated deferral and the reversal, and that’s why we didn’t restate any of the prior periods.

Except what David Chidester is asserting is wrong. He’s suggesting that there’s an immaterial difference in certain numbers, and that the reporting is correct Because Overstock Said So. Why isn’t Overstock.com presenting those numbers and letting shareholders decide what they think? If the numbers are of no consequence, why isn’t Overstock providing them? If they do not matter one way or another, why not disclose them?

While Patrick Byrne would love to wave his hand and sneer, “Immaterial….” the SEC doesn’t necessarily agree with that assessment.

SEC Staff Accounting Bulletin 99 addresses materiality, and includes the following snippets:

For the reasons noted above, the staff believes that a registrant and the auditors of its financial statements should not assume that even small intentional misstatements in financial statements, for example those pursuant to actions to “manage” earnings, are immaterial. While the intent of management does not render a misstatement material, it may provide significant evidence of materiality. The evidence may be particularly compelling where management has intentionally misstated items in the financial statements to “manage” reported earnings.

2. Immaterial Misstatements That are Intentional

Facts: A registrant’s management intentionally has made adjustments to various financial statement items in a manner inconsistent with GAAP. In each accounting period in which such actions were taken, none of the individual adjustments is by itself material, nor is the aggregate effect on the financial statements taken as a whole material for the period. The registrant’s earnings “management” has been effected at the direction or acquiescence of management in the belief that any deviations from GAAP have been immaterial and that accordingly the accounting is permissible.

Question: In the staff’s view, may a registrant make intentional immaterial misstatements in its financial statements?

Interpretive Response: No. In certain circumstances, intentional immaterial misstatements are unlawful.

If everything is on the up-and-up, I don’t understand why Overstock.com doesn’t just report the numbers. Offer up the information in the interest of transparency. Quit doing things that make it look like you’re trying to manipulate the financial statements again and again.

So it’s clear… either GAAP rules apply and what the SEC says matters, or what really matters is what Patrick Byrne thinks and all public companies will now be required to follow BOSS instead of GAAP.

15 thoughts on “GAAP Being Replaced By BOSS”

  1. Staff Accounting Bulletin 99 is far more comprehensive than the excerpts you’ve printed. In particular, the section that clearly applies to the current treatment of revenues by Overstock.com:

    “Aggregating and Netting Misstatements

    In determining whether multiple misstatements cause the financial statements to be materially misstated, registrants and the auditors of their financial statements should consider each misstatement separately and the aggregate effect of all misstatements.23 A registrant and its auditor should evaluate misstatements in light of quantitative and qualitative factors and “consider whether, in relation to individual line item amounts, subtotals, or totals in the financial statements, they materially misstate the financial statements taken as a whole.”24 This requires consideration of –

    the significance of an item to a particular entity (for example, inventories to a manufacturing company), the pervasiveness of the misstatement (such as whether it affects the presentation of numerous financial statement items), and the effect of the misstatement on the financial statements taken as a whole ….25

    Registrants and their auditors first should consider whether each misstatement is material, irrespective of its effect when combined with other misstatements. The literature notes that the analysis should consider whether the misstatement of “individual amounts” causes a material misstatement of the financial statements taken as a whole. As with materiality generally, this analysis requires consideration of both quantitative and qualitative factors.

    If the misstatement of an individual amount causes the financial statements as a whole to be materially misstated, that effect cannot be eliminated by other misstatements whose effect may be to diminish the impact of the misstatement on other financial statement items. To take an obvious example, if a registrant’s revenues are a material financial statement item and if they are materially overstated, the financial statements taken as a whole will be materially misleading even if the effect on earnings is completely offset by an equivalent overstatement of expenses.

    Even though a misstatement of an individual amount may not cause the financial statements taken as a whole to be materially misstated, it may nonetheless, when aggregated with other misstatements, render the financial statements taken as a whole to be materially misleading. Registrants and the auditors of their financial statements accordingly should consider the effect of the misstatement on subtotals or totals. The auditor should aggregate all misstatements that affect each subtotal or total and consider whether the misstatements in the aggregate affect the subtotal or total in a way that causes the registrant’s financial statements taken as a whole to be materially misleading.26

    The staff believes that, in considering the aggregate effect of multiple misstatements on a subtotal or total, registrants and the auditors of their financial statements should exercise particular care when considering whether to offset (or the appropriateness of offsetting) a misstatement of an estimated amount with a misstatement of an item capable of precise measurement. As noted above, assessments of materiality should never be purely mechanical; given the imprecision inherent in estimates, there is by definition a corresponding imprecision in the aggregation of misstatements involving estimates with those that do not involve an estimate.

    Registrants and auditors also should consider the effect of misstatements from prior periods on the current financial statements. For example, the auditing literature states,

    Matters underlying adjustments proposed by the auditor but not recorded by the entity could potentially cause future financial statements to be materially misstated, even though the auditor has concluded that the adjustments are not material to the current financial statements.27

    This may be particularly the case where immaterial misstatements recur in several years and the cumulative effect becomes material in the current year.”

    Now would revenues in 1st Q 2007 have been materially higher if revenues were booked on estimated delivery date, rather than ship date? No, it would have been less than 1%.

    Would any reasonable investor found the changes in revenue material to Overstock’s financial statements?

    If revenues from each quarter are pushed into the next, what is the cumulative effect long-term?

    There are a number of other guidelines that the SEC suggests to decide materiality, which you’ve excluded to discuss.

    Finally, Overstock stated that they feel that the current treatment is in accordance with GAAP and the SEC. Do you have any evidence to prove otherwise?

  2. Sanjeev – That was all lovely. I’m not arguing for or against the definition of materiality. I’m just saying that Overstock can’t simply use the argument that their fudged numbers are immaterial and ask us to ignore them. If the misstatement is deliberate (and it is) then the small amount is the least of their worries.

    As for whether an investor would find this issue material… I say yes. When upper management has exhibited a pattern of deception and outright lies in regard to their financial statements, I think this is an important matter that investors would want to know about.

    And you’re right, Overstock says the 2008 numbers are correct under GAAP. And they’ve said the 2007 numbers are not calculated in accordance with GAAP.

  3. What are you talking about? You’re contradicting yourself.

    From s reasonable estimation, that revenues would have changed by less than 1% for 1st Q 2007, is that material or not to the lay investor?

    Did that have significant impact on earnings, cumulative revenues, or profitability as a going forward concern?

    Do you have any sort of evidence that this current treatment was not approved by the SEC or Overstock’s auditor?

  4. What am I talking about? What are YOU talking about? If you’ve read my posts on this subject, you will see that I have not argued with the current treatment of revenues.

    And yes, the issue I raised is material because even though the dollar figure is low, upper management’s pattern of deception makes the issue material. They have a history of lying about their numbers, creating phony accounting measures, and comparing numbers that cannot and should not be compared. That’s material.

  5. Please take a look at the bulletin again: Does it state anywhere in there that “upper management’s pattern of deception makes the issue material?”

    Where was the deception? The charge was taken, and it was immaterial. The SEC approved the treatment. In the conference call they disclosed that they took the charge. It was shown in the financials. Any reasonable person, including the SEC, would conclude that full disclosure was provided.

  6. Sanjeev – Who are you arguing with? I’ve never made any claims about a charge that was taken by Overstock, or about any disclosures made in regard to that charge. If you want to discuss any further issues, I suggest you read what I’ve written here first. That way, you can argue with me about something I’ve actually said.

  7. And even though you’re arguing about something I’ve never said, here is the part of the bulletin that applies to management’s deception:

    A registrant and its auditor should evaluate misstatements in light of quantitative and qualitative factors and “consider whether, in relation to individual line item amounts, subtotals, or totals in the financial statements, they materially misstate the financial statements taken as a whole.

    QUALITATIVE factors (the quality of the data and disclosures) must be taken into consideration. Deception by management definitely is a part of the quality of the numbers.

  8. No, no Tracey! You’re not going to get away that easily? What deception are you suggesting that would make that material? Did you or did you not in your blog, suggest to readers that Overstock is involved in a deliberate and malicious undertaking to deceive investors? Within the context of that accusation, are you saying that Patrick Byrne and his executive board are in collusion to defraud investors?

  9. Easy? You think this is easy… dealing with someone who hasn’t even read what I’ve written and is arguing with me over a statement I didn’t make?

    If “that” is the “charge” and related disclosure you’ve referred to a few times now… I never said that the charge or the disclosure were inappropriate or deceitful.

    There are other things management has done at Overstock which I believe are deliberate attempts to mislead and defraud investors. For those, see the rest of this blog. Just type “overstock” into the search box and start reading.

  10. In the above blog, I quote:

    “If everything is on the up-and-up, I don’t understand why Overstock.com doesn’t just report the numbers. Offer up the information in the interest of transparency. Quit doing things that make it look like you’re trying to manipulate the financial statements again and again.”

    Tracey, are you saying that Overstock.com, including Patrick Byrne, Jonathan Johnson, David Chidester, and the rest of the executive board, are manipulating the financial statements?

    That’s what I see from the quote. Please confirm if this is what you are doing.

  11. No, no Tracey. It’s a simple enough question.

    Are you saying that Overstock.com, including Patrick Byrne, Jonathan Johnson, David Chidester, and the rest of the executive board, are manipulating Overstock.com’s financial statements?

    Simple question…yes or no! What is your answer?

  12. Simple answer: The quote speaks for itself. Now please add something useful to this conversation or quit posting.

  13. C’mon Tracey, stand behind your analysis. Answer the question without any of the charade:

    Do you believe that Overstock.com, including Patrick Byrne, Jonathan Johnson, David Chidester and the rest of the executive board are manipulating Overstock.com’s financial statements? Yes or no!

    You’re a forensic accountant. This is a very easy answer. If you want your analysis and blog to have some legitmacy, you have to stand behind your analysis and commentary.

    You know what they say, “Those that stand for nothing, fall for everything!” Stand up and provide a strong answer…yes or no! Is Overstock.com manipulating their financial statements?

  14. Sanjeev – This may come as a shock to you, but I am not seeking your approval of my blogging activities. I am not inclined to answer a question which has been answered over and over on this blog.

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