A New Look at Herbalife

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Yesterday the stock of Herbalife (NYSE:HLF) dropped 20 percent when David Einhorn of Greenlight Capital began asking questions during the company’s earnings call. Herbalife is a multi-level marketing company which sells vitamins. The company describes itself:

We pursue our mission of “changing people’s lives” by providing a financially rewarding business opportunity to distributors and quality products to distributors and customers who seek a healthy lifestyle. We are one of the largest network marketing companies in the world with net sales of approximately $3.5 billion for the fiscal year ended December 31, 2011. As of December 31, 2011, we sold our products in 79 countries through a network of approximately 2.7 million independent distributors. Continue reading

Groupon’s Latest Accounting Problem

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On Friday, the market eagerly awaited the release of Groupon’s (GRPN)10-K, detailing results for the year ended December 31, 2011. Shares were up 3.84% during regular trading hours, but dropped as much as 8% (eventually settling at -5.93%) in after hours trading when the company announced its figures were not as good as reported in February.

Revised Numbers

Some news sites are billing this as a restatement, although it would appear to be more of a revision to the numbers, as the original numbers were simply cited in an earnings release and the financial statements weren’t actually issued until Friday. Continue reading

Auditor Rotation Won’t Make Audits Better

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Last week, CFO Magazine published an article online about CFOs opposing the potential proposal by the  Public Company Accounting Oversight Board (PCAOB) requiring companies to switch auditors every 5 to 10 years.  More than 625 comment letters, many from CFOs, controllers, chief accounting officers, and audit committee chairs,  have been submitted to PCAOB since the organization raised the issue of mandatory auditor rotation in August.

The PCAOB is suggesting that forcing companies to change auditors every few years will make the audits better. They say that a new accounting firm would equal a fresh set of eyes, and therefore a more skeptical audit. Continue reading

Fraudulent Accounting Practices: Easy to Commit, Hard to Find

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We hear almost daily reports of companies engaging in accounting shenanigans to boost their apparent performance. As of late, companies like Diamond Foods (DMND), Green Mountain Coffee Roasters (GMCR) and Avon Products Inc. (AVP) are grabbing headlines for their alleged bad behavior.

Avon has been under the shadow of bribery allegations, in violation of the Foreign Corrupt Practices Act (FCPA), since at least 2008. The company has spent hundreds of millions of dollars conducting internal investigations, has lost at least four executives linked to bribery in China, and has been suffering from poor financial performance. And now it appears that Avon may have been aware of bribes being paid as far back as 2005, meaning the company’s problems may soon get even worse. Continue reading

Groupon: Problems With Customer Loyalty and Marketing Costs

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Prior to Groupon’s IPO last year, I wrote a few articles that were critical of the company. In one of my articles, I noted problems with loyalty of customers and merchants:

  • It’s expensive to get new customers. Sure, a large email list is nice. But how much does it cost to get people on it, and more importantly, how much does it cost to get buying customers on it?
  • Only about 21% of subscribers have purchased a Groupon since January of 2009. The company has nearly 143 million subscribers, but less than 30 million of those have actually made a purchase. Worse yet, only 16 million (or 11%) are repeat customers, buying more than one Groupon since January of 2009. Continue reading

When Employees Steal, the SEC May Punish the Company and the CEO

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Guest Post by Keith Paul Bishop

Editor’s Note: This article was originally published on Keith Bishop’s blog, California Corporate & Securities Law on November 23, 2011. It offers us a different view from that of Tracy Coenen regarding the SEC’s action against Michael Koss and Koss Corp. for the embezzlement perpetrated by Sujata Sachdeva.

In this week’s issue of Compliance Week, Tammy Whitehouse writes about the SEC’s recent enforcement action against Koss Corporation and Michael J. Koss, its Chief Executive Officer and former Chief Financial Officer. Continue reading

J2 Global Communications Trying to Hide Accounting Errors

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J2 Global Communications (NasdaqGS: JCOM ), better known as eFax, is under fire. Yesterday, Sam Antar tore into the company for an accounting gimmick that the company (and its auditors) had to know was wrong. The issue involves revenue and deferred revenue.

In the 10-Q for the first quarter of 2011, J2 reported an upgrade to its accounting system. The new system gave J2 the ability to properly calculate unearned revenue from annual contracts with customers: Continue reading

Compliance Week: Koss Embezzlement and Small Company Internal Controls

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Today’s Compliance Week article, “SEC Pursues Small Company Over Lax Internal Controls,” [subscription required] discusses the SEC settlement with Koss Corp over the $34 million embezzlement by former Vice President of Finance Sujata (Sue) Sachdeva.

The article explains the settlement, which is essentially a clawback of some of Michael Koss’s compensation: Continue reading

Financial Statement Fraud: Olympus Makes It Look Easy

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What is a company to do when it wants to hide losses? Manipulation of the financial statements is the obvious first choice. It’s not hard. Sure companies have “internal controls,” which are supposed to include policies and procedures which ensure that financial information is properly recorded. But companies of all sizes have problems with their internal controls, such that it’s not terribly difficult to issue fraudulent financial statements.

Michael Woodford was dismissed in October as CEO of Olympus, and subsequently disclosed that he was fired because he raised questions about some acquisitions by the company. He alleges that Olympus paid incredibly high prices for companies it acquired, and also paid huge “advisory fees” to agents who supposedly represented Olympus in the transactions. The purpose behind these transactions? To cover up investment losses that were decades old without drawing any attention to the issue. Continue reading

Groupon IPO: Investors Beware the Unaudited Financial Statements

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It’s crunch time for Groupon (GRPN). The roadshow for the company’s Initial Public Offering went live last week, and Groupon’s offering will happen this week. Demand for the shares is apparently through the roof. The company was hoping to sell 30 million shares at $16 to $18 each, but word is that Groupon is now looking at increasing the offering price.

You can see the slide deck for the roadshow here. The presentation highlights the company’s massive growth, marketplace penetration, and ability to earn revenue. Continue reading