Bloomberg News

Groupon Revisions Highlight New Model’s Risks

April 02, 2012

Groupon Inc's initial public offering and listing on the NASDAQ in New York. Photographer: Zef Nikolla/NASDAQ/Corbis

Groupon Inc's initial public offering and listing on the NASDAQ in New York. Photographer: Zef Nikolla/NASDAQ/Corbis

Groupon Inc. (GRPN:US)’s latest restatement, following accounting missteps last year, heightens concern about the reliability of the company’s financial reporting and raises questions whether auditors gave enough oversight to the coupon provider’s novel business model.

The Chicago-based company reported a “material weakness” in financial controls on March 30 and said fourth-quarter sales were lower than previously stated because of higher refunds to merchants. That cut revenue in the period -- Groupon’s first as a public company -- by $14.3 million to $492.2 million.

The announcement added to setbacks for Groupon, which has struggled to get its financial statements in order since filing for an initial public offering in June. The company abandoned an accounting method for operating income after a review by regulators and later restated 2010 results. The moves raise questions about why Groupon’s auditor, Ernst & Young LLP, didn’t point out concerns sooner, said Herman Leung, an analyst at Susquehanna Financial Group in San Francisco.

“This should have been highlighted by the auditors,” said Leung, who has a neutral rating on shares of Groupon and doesn’t own the stock. “The business is growing so fast that it sounds like they don’t have the proper financial controls to deal with the growth.”

Shares Fall

Groupon’s stock (GRPN:US) had its biggest one-day decline today, dropping 17 percent to $15.28 at the close in New York. The shares have dropped 24 percent since the IPO in November.

Groupon has been working with KPMG LLP to address the causes of the material weakness, said Paul Taaffe, a company spokesman. PricewaterhouseCoopers LLP and Deloitte & Touche LLP have also worked with Groupon, Taaffe said.

Charlie Perkins, a spokesman for New York-based Ernst & Young, declined to comment on the earnings restatement.

To address the concerns, Groupon also is bringing in more finance personnel.

“Although we plan to complete this remediation process as quickly as possible, we cannot at this time estimate how long it will take, and our initiatives may not prove to be successful in remediating this material weakness,” Groupon said in the regulatory filing. Still, the company plans to report on the effectiveness of its internal controls by the end of this year.

‘Extremely Unusual’

Restatements and disclosures of material weaknesses are rare this soon after an IPO because the Securities and Exchange Commission requires detailed checks on financial controls before a debut, said Lise Buyer, principal at Class V Group.

“It’s extremely unusual, as companies generally go through very thorough audits before filing and so should have their policies and procedures fairly well ironed out,” said Buyer, whose firm is based in Portola Valley, California. She advises startups on public offerings.

Just 12 percent of companies reported having ineffective financial-reporting controls within their first year of trading, according to data provider Audit Analytics. The Sutton, Massachusetts-based research firm looked at 1,848 companies that held IPOs since January 2004.

Groupon said it failed to account for an increase in higher-priced deals, which are more likely to be refunded by customers. The company started selling discounts on plane tickets in partnership with Expedia Inc. (EXPE:US) last year and began offering Groupon Reserve, a service for upscale deals such as a five-course meal at Santa Monica, California-based restaurant Whist for $99.

Groupon said the latest changes “are primarily related to an increase to the company’s refund reserve accrual,” leading to higher reimbursement rates.

Refunds, Reimbursements

The company says it will refund the purchase price of coupons, known as Groupons, in cases where a customer isn’t satisfied. Still, Groupon has a limited period during which it can seek reimbursement from a merchant for a refund, and its customers may try to get refunds in cases where the company can’t get reimbursed from partners.

“Our inability to seek reimbursement from our merchant partners for refund claims could have an adverse effect on our liquidity and profitability,” Groupon said in its filing.

The higher refunds boosted operating expenses that in turn widened Groupon’s net loss by $22.6 million, or 4 cents a share. The company held to a forecast for first-quarter sales of $510 million to $550 million and income from operations of $15 million to $35 million.

Accountants may have had difficulty tracking changes in refunds because Groupon’s business model is relatively new, said Tom Taulli, an IPO consultant in Newport Beach, California.

‘Little History’

Groupon pioneered the market for daily deals, which offer discounts on restaurant meals, nail-salon packages and other services. Groupon splits the revenue from the offers with merchants.

“There is very little history on return rates,” Taulli said. “Groupon hasn’t been around for a long time and has been expanding so quickly, it’s got to be a nightmare for an auditing firm.”

Groupon also stumbled ahead of its IPO when Chairman Eric Lefkofsky said the company is “going to be wildly profitable” in an interview with Bloomberg News. In July, the company updated its IPO filing, asking investors to disregard those comments because they didn’t accurately or completely reflect his views.

To contact the reporter on this story: Douglas Macmillan in New York at dmacmillan3@bloomberg.net

To contact the editor responsible for this story: Tom Giles at tgiles5@bloomberg.net


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Companies Mentioned

  • GRPN
    (Groupon Inc)
    • $7.92 USD
    • 0.13
    • 1.64%
  • EXPE
    (Expedia Inc)
    • $88.06 USD
    • 0.27
    • 0.31%
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