Today, Groupon filed a series of letters exchanged with the U.S. Securities and Exchange Commission in which the agency continued to raise questions about the daily deal site’s accounting and disclosures.
The letters are actually dated from August through October this year. And they refer to issues raised in Groupon’s 2011 1o-K and it’s first quarter 10-Q. Such documents are typically not disclosed by companies until several weeks after they are exchanged.
No action was ultimately taken. Groupon did agree to revise some disclosures.
Initially, the SEC had concerns about the information Groupon was disclosing related to a series of new services: Groupon Getaways, Groupon Live, and Groupon Goods. The agency wanted more information about how these were contributing to revenue, how many refunds customers were requesting, and the impact on Groupon’s refund reserves.
The agency was also concerned about Groupon’s disclosure of material weaknesses:
“Please explain in more detail each of the three “primary factors” that contributed to this material weakness, the specific accounts impacted by these “factors,” and how you determined that these three “factors” indicated that there was only one material weakness and it was limited to the financial close process. Additionally, please describe the considerations made in determining to aggregate control deficiencies.”
The company said the new categories were branding moves, but not really separate categories of businesses. However, it did agree to revise its 10-Q to include more information about cash flows.
Groupon also said, in response to an SEC question, that its sudden increase in cash was mainly the result of the growth of the company, and not to changes in the mix of deals or the changes it had announced in the rate it paid merchants.
Probably the most troubling part of this response, however, was the disclosure about what led to the material weaknesses. In sum, it paints a picture of a company unable to fundamentally cope with its torrid growth.
“The Company’s accounting organization and its financial statement close process were not able to adequately keep pace with the rapid growth of the Company. The year-end financial statement close process was further impacted by a number of operational and organizational changes in the fourth quarter of 2011. In addition, the Company was required to execute its close process and undergo a financial statement audit in a significantly accelerated timeframe compared to prior years. These additional factors did not allow for adequate time to complete an effective review of account reconciliations.”
The problems, specifically, quoting from Groupon’s letter:
- Implementation and formalization of written policies and procedures for the review of account analyses, reconciliations and journal entries;
- Assigning account reconciliations and journal entries during the reporting period close process to specific individuals;
- Formal documentation of procedures performed during the close process;
- Implementation of enhanced oversight procedures to ensure that the account reconciliation review process are performed prior to finalization of the financial statements at each reporting period; and
- Evaluation of accounting for non-routine judgments and estimations.
“While the activities noted in the above two factors should be performed in the ordinary course of preparing the financial statements, the Company instead needed to undertake significant efforts to complete reconciliations and investigate items identified in those reconciliations in the midst of other operational changes impacting the normal close procedures and a financial statement audit.”
It’s a wonder that the company was able to report anything. Keep in mind, this was all occurring even as Groupon was going public in November of last year. And subsequently, the company would have to restate earnings after the IPO.
Still, the SEC seemed largely satisfied with these explanations. It did have a follow-up request for more disclosure about direct revenues that Groupon received. Groupon agreed to more disclosure. And on Oct. 4, the SEC informed the company that matter was closed for now.
Again, none of this seems to be criminal. But at the same time, it remains striking at just how unprepared the company seemed to be at the very moment it was asking investors to dump millions of dollars into its stock.
Of course, we probably shouldn’t be surprised that Groupon’s stock is trading at $3.71 per share today. Just a tad off its $26.11 close on the first day of trading on Nov. 2, 2011.
Happy IPO anniversary!