Anthony Catanach Jr., an associate professor at the Villanova University School of Business, is a longtime critic of Groupon, and he just renewed his attacks on the daily deal giant.
In August 2011, he predicted on his blog, Grumpy Old Accountants, that the SEC would probe Groupon's numbers — and it came to pass, seven months later.
This time around, Catanach calls into question a grab-bag of accounting items in Groupon's annual report. He says:
- Groupon is no good at estimating the value of companies it buys.
- Groupon's estimate of the amount of intangible "goodwill" on its balance sheet is ripe for a writedown.
- Groupon's estimate of its deferred tax assets is shaky.
- Groupon uses a non-GAAP accounting method that's "a curious metric that inflates operating performance."
In his post, Catanach says, "Heads up SEC…you too E&Y!"
(We emailed Groupon for comment and we'll update this post if we hear back.)
The backdrop here is that Groupon is struggling to reorient its business away from a dependence on daily email deals toward selling goods directly, and by generally providing a marketing infrastructure for local businesses.
It also recently fired its CEO, Andrew Mason.
Here are a couple of highlights from Catanach's deep-dive into Groupon's numbers:
Remember how the grumpies complained last August about Groupon’s “unusual” gain on an e-commerce transaction that created second quarter profitability (see Groupon: Still Accounting Challenged)? This was a gain driven solely by the Company’s own estimates of fair value, the reasonableness of which we questioned at the time. Well, guess what? We were right again! In the fourth quarter (literally at the eleventh hour), the Company revised its value estimate of its F-tuan investment downward by almost 40 percent resulting in a write-down of $50.6 million (2012 10-K, page 84). This turnabout almost completely reverses the pre-tax $56 million gain that Groupon reported in the second quarter of 2012.
... In fact, cracks are beginning to appear in the goodwill numbers. International segment revenue actually declined 15.9 percent in the final quarter of 2012 (2012 10-K, page 38) raising questions about reported international goodwill amounts.
... despite the declines in gross profit percentage, income from operations has turned positive for the first time primarily due to reduced marketing expenses. The dramatic reversals in marketing and selling, general, and administrative (SG&A) expenses may reflect the Company’s changing business model, but given Groupon’s past reporting issues, one wonders if some of this expense volatility is due to the aforementioned decision to reclassify financial statement items. Just a thought.
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