Groupon shares fall after yet another accounting error

Groupon shares tumbled 6% in after-hours trading on the weekend after the group buying pioneer announced yet another accounting error meant its fourth-quarter results were weaker than expected due to more customers demanding refunds.

And in a double-blow for the company, Ernst & Young also included a “statement of material weakness” – a red flag for investors and analysts.

It’s the second financial embarrassment for the company, after it amended its original S1 filing last year after accountants took issue with a non-traditional accounting metric that could have overstated its actual earning potential.

Groupon originally said its fourth-quarter loss was $US42.7 million, or eight cents per share, although revenue had nearly tripled to $506.5 million.

But late last week, the company said a higher number of customers asking for refunds prompted a revision. Policy dictates any customer unhappy with their experience is entitled to their money back.

“The revisions are primarily related to an increase to the Company’s refund reserve accrual to reflect a shift in the Company’s fourth quarter deal mix and higher price point offers, which have higher refund rates,” it said in a statement.

Now, Groupon says its loss is actually $US65.3 million, with revenue also reduced by $14.3 million.

However, it said the business had updated the way it handles refunds.

“We remain confident in the fundamentals of our business, as our performance continues to highlight the value that we provide to customers and merchants,” chief financial officer Jason Child said in a statement, also saying previous earnings guidance remains unchanged.

First-quarter sales are expected to be between $510-550 million.

However, analysts are more concerned over a statement of “material weakness”, with auditor Ernst & Young saying there was a deficiency in the financial statement process.

Groupon says it’s been working with another accounting firm to work on the effectiveness of its total controls, and is also working on fixing the problem through new “improvement initiatives” and changes to its staffing.

Morningstar analyst Rick Summer has said the latest situation is “serious”.

“It is troubling if you have accounting irregularities out of the gate,” Summer said to the Chicago Sun-Times.

“This is a big company with blue-chip investors, blue-chip investment banks, blue-chip accounting firms and what was deemed to be a blue-chip management team.”

Analysts were already concerned over Groupon’s finances. The company is yet to make a profit, saying marketing expenses come first as it chases aggressive expansion.

Last year, the company caused controversy over a non-traditional accounting metric used in its S1 filing, which was eventually removed, resulting in changes to its financial statement.

Questions have also been raised as to the amount of money the founders have cashed out of the business, while last year, a memo to employees sent by chief executive Andrew Mason was leaked to the media during what was supposed to be a “quiet” period before listing.

The incident reportedly sparked questions from the Securities and Exchange Commission – especially after one executive claimed the company would be “wildly profitable”.


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