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:
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?
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.
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.