Conclusion: Groupon’s accounting scandal surfaced as
the company geared up for its Initial Public Offering in 2011. Groupon misled
investors by using non-GAAP metrics, Adjusted Consolidated Segmented Operating
Income, which inflated its income by ignoring marketing expenses. The company
also masked its internal control over financial reporting weaknesses.
and Evidence: The red
warning signal from the get go was the use of Adjusted
Consolidated Segmented Operating Income (ACSOI) to report financial statements.
The problem with this measure was that it did not take into consideration
online marking expenses, stock based compensation and acquisition expenses
while calculating earnings. As a result, the company was showing positive
operating income while making losses. The reason provided for excluding online
marketing costs was that it was a one-time cost to expand customer base and
thus should be reported as an asset rather than an expense. However, this
assumption is unsubstantiated because not every marketing dollar was going to
convert into sales dollar.
Another tactic Groupon used to paint its
financial position positively was by reporting revenue before excluding the
share it owes to the merchants. Groupon would recognize cash as soon as it
would make a sale however, they did not pay the merchants until 60 days later.
Under the redemption method, the merchants were not compensated until the
customer redeemed the Groupon. There was also ambiguity as to the negotiated
terms with the merchants when the customer does not redeem the Groupon. As the
company grew, they were able to record increasing cash from new sales as
compared to paying merchants for old Groupons that were redeemed. Eventually, Groupon
ended up owing more cash to its merchants than it had collected. As a result,
operating cash shortage jeopardized the company’s ability to continue its
future plans. Groupon also showcased a weak business model by paying out $942
million of the $1.1 billion that it generated to investors early on as spotted
by Blodget. If the company had decided differently, they could have utilized
this cash during the crisis.
Groupon’s condition escalated when the
company reported a “material weakness” in its internal control and disclosed
that the fourth quarter sales were lower than initially reported in March 2012.
The company claimed to have underestimated customer refunds for higher priced
purchases such as discounted plane tickets and fancy dinner outings. Groupon
collected higher revenue on such offerings but did not consider the increased
potential for returns from the customers. Additionally, “Groupon Promise” meant
that a customer could ask a refund at anytime if they were dissatisfied with
the services. But the company failed to account that these refunds could affect
the financials significantly. Revenues decreased by $14 million approximately
and the stock price dived from initial $20 to $15.28 post the news. Groupon was
growing at an exponential rate but the company did not strengthen their
financial controls to cop with the growth. Ernst and Young, company’s external
auditors, failed to point out internal control weaknesses and issued an
Furthermore, Groupon considered
themselves the primary obligator for revenue recognition purposes. There were couple
inconsistencies with this consideration. Firstly, the company was recognizing
revenue before the goods or services delivered to the customers by the
merchants. Secondly, revenues generated from providing goods and services were
combined instead of listing separately. This bolsters the fact that Groupon did
not provide accurate information for potential investors to judge the profitability
of the business.
has made saving money convenient and easy. However, they do not have a monopoly
in the online coupon market. There is fierce competition domestically and internationally.
Negative publicity and rising competition hindered the company’s growth