My article in the AICPA Corporate Finance Insider Newsletter

Reasonable accountants can disagree about whether a move to International Financial Reporting Standards (IFRS) will improve financial reporting. One key concern is that principles-based financial statements are much more susceptible to fraud. Rather than relying on strict rules, management’s judgment will guide much of the reporting. Clearly this creates a risk of fraud, but how big is the risk?

In July, critics attacked Groupon (GRPN) and it use of a made-up accounting measure management called Adjusted CSOI. I suggested that the company made up the measure to exclude many of the company’s expenses to make the company look more successful.

There was more to the story, however, as the Grumpy Old Accountants revealed Generally Accepted Accounting Principles (GAAP) violations in reporting revenue. Essentially, Groupon was recording more than twice the amount of revenue it should have been reporting under GAAP. The Grumpies explained:

Al Rosen, a forensic accountant and principal of Rosen & Associates in Toronto wrote about his opinion on IFRS (International Financial Reporting Standards) in Canadian Business magazine.

The U.S. might be moving from GAAP (Generally Accepted Accounting Principles) to IFRS, although there isn’t hasn’t been a final decision or a timeline for doing so. The problems that Rosen cites probably apply equally to the U.S. Under GAAP reporting, the system developed and used in the U.S., changes can be made to the rules based upon business conditions here and abuses of the rules.

If we move to an international standard, we end up losing control and playing by an international standard for which control is far removed from U.S. regulators. Here’s what Rosen had to say (bold added by me):

A fellow AOL blogger, Victoria Erhart, wrote a fantastic piece on Bloggingstocks,
GAAP vs. IFRS: New accounting rules could mean trouble.She looks at the problems that will surely come up if the U.S. switches to International Financial Reporting Standards (IFRS).

Currently, U.S. accounting programs teach Generally Accepted Accounting Principles (GAAP) because that’s what’s used in the U.S. And the CPA exam tests accountants on GAAP, again because that’s what’s used.

But if American companies switch to IFRS, there’s going to be a problem. Who will teach IFRS? The move to IFRS makes sense simply because of the global nature of the modern business world. Victoria says:

Sam Antar has a great article today on Overstock.com (NASDAQ:OSTK) continuing to overstate EBITDA. Specifically, Sam says:

In Overstock.com’s Q1 2008 earnings release and 10-Q report the company continued to improperly remove from its EBITDA calculation, certain stock-based expenses in violation of Regulation G. As a result, Overstock.com’s reported Q1 2008 EBITDA of $3.524 million was materially overstated by $1.339 million or about 61%.

And of course, that overstatement is in addition to the overstatement that results from Overstock.com calculating EBITDA by starting with operating income, instead of net income, as required by the SEC rules. Some people erroneously believe it’s okay to start with a different figure when calculating EBITDA. That’s not true.

The SEC does not permit companies to do that because of the confusion it could cause:

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?)

Yesterday Sam Antar printed a very interesting piece on his blog that sharply criticized the 2008 first quarter earnings release of Overstock.com (NASDAQ:OSTK). I picked up the most damaging part of it, which related to Overstock claiming a 27% increase in revenue over 2007. The problem was that 2008 was calculated in a different way than 2007, so the numbers are not comparable. First quarter 2008 numbers got a “bump” that made the quarter’s increase over the prior year look bigger than it should.

But leave it to Overstock to make matters worse. An article today on Wired.com says the following:

Today convicted felon Sam Antar has an exciting piece on his blog about Overstock.com (NASDAQ:OSTK) and how it fudged its earnings figures in Friday’s press release, caused a short squeeze right before options expired, and continued on Patrick Byrne’s path of misleading investors.

It all began with a press release reporting 2008 earnings, saying that total revenue was $200.7 million versus $157.9 million for the same period in 2007, which was a 27% increase.

Of course, those figures were not on the up-and-up. *gasp*

The comparison of the revenue figures was faulty because 2008 figures were calculated on a GAAP basis, while 2007 figures were on a non-GAAP basis. The 2008 figures included revenue that would have been part of 2007 using Overstock’s non-GAAP reporting methodology. (So 2008 figures were bumped up, when compared to 2007 figures.)

I issued a report to Fraud Discovery Institute about many of the financial issues raised in the Usana Health Sciences matter. The report clarifies the issues and why they’re important from an accounting perspective, specifically regarding Generally Accepted Accounting Principles (GAAP), materiality, and disclosures.

A few of the high points of my report include: