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Copy of Groupon Accounting Scandal

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by tom zhuu on 11 December 2012

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Transcript of Copy of Groupon Accounting Scandal

Accounting Issues By: Tom Zhu, Rahul Patel, Sheena Cheng, Sam Mok Groupon Accounting Scandals The History of Groupon Groupon was created by Andrew Mason, who is still the CEO to this day The name Groupon comes from the blending the two words, group and coupon. Andrew Mason thought up the basic idea of Groupon in 2006, while he was trying to cancel a cell phone contract. It was hard for him to cancel the contract and he knew others had the same problem. Andrew thought that together, they could collectively make a difference if they reached what he called a “tipping point”. Similarly, this was applied to Groupon; if enough people bought the coupon, passing the tipping point, they would receive the discount In just 16 months the value of the company jumped to an astonishing one billion dollars.


In late 2010, Google offered $6 billion dollars to buy out Groupon. Now if you guys were the owners of Groupon, and in just 2 years of being in business, someone offered to buy your company for $6 billion dollars, would you do it? … Well Groupon rejected the bid.

In 2011, Groupon raised 1.12 billion dollars in venture capital, but it lost 940 million dollars paying out their early founders and investors. Throughout the year, Groupon filed their first IPO (initial public offering), got caught with their accounting tricks, pulled their IPO off the market, and put it back. By the end of it, Groupons value diminished by billions of dollars. What Accounting Rule They Violated The biggest factor that led to Groupon's loss in stock value and its overall company worth was the weaknesses in its accounting department, and how they hid company losses from investors Using a controversial accounting metric called the Adjusted Consolidated Segment Operating Income (ACSOI), Groupon was reporting a positive operating income rather than a loss But how does ASCOI work? The ASCOI metric considers that when marketing expenses are incurred, they should be recorded as an asset rather than an expense Although they still account for the expense by amortizing it over time, this metric allowed Groupon to hide their expenses and dramatically overstate their income Companies who use ASCOI assume that they are making a brand name and that by doing so, they will interest customers to their business Thus, the marketing expenses should actually be counted as an asset because it helps the company to make money However, this is a wrongful assumption since not all people that are interested in the company are going to purchase goods or services Since this the Adjusted Consolidated Segment Operating Income metric overstates the company's net income and hides its losses, this metric is prohibited by the Financial Accounting Standards board Why did they violate standards and how did they respond? Groupon wanted to present the numbers in favour of their company and to show their potential investors that they were an ideal investment Groupon was able to make their earnings seem a lot higher by recording a sale, but not considering the purchase price and other expenses to make the sale. Eric Lefkofsky, Andrews previous employer, was so into the idea that he invested a million dollars in the start-up of the business.
Groupon launched in November of 2008, with their first offer being half off pizza in a joint that was located in the same building as their first office. Groupon really did not have such revenues, and instead dropped lower when they did not predict the high amount of returns. Quote from Andrew Mason, CEO, “A bush league mistake that our auditors looked at. Smart people can get this stuff wrong. We’re inventing a new industry.” The company admitted to “material weakness” but information was misstated, but not accidental.

What other way do you think they could have responded to the public about their accusations? Who is affected by the implications of the incident? The implications of Groupon’s downfall affected:

the company itself
shareholders
businesses associated with Groupon
their customers As Groupon’s brand began to crumble, its shareholders were negatively affected because the company began losing their once-valued customers. Since Groupon's brand has been soiled by lawsuits and bankruptcy, it is natural for consumers to see companies assiosiated with Groupon as the same. Small businesses affiliated with Groupon are affected the most because Groupon customers flood the restaurants, order very low priced meals, and strain waiters and cooks. Approximately 20-40% of purchasers never redeem their coupons. What Happened to their Stocks? When Groupon started working towards their Initial Public Offering (IPO) on the stock market, the company was heavily criticized for its operating practices. Practices such as the ASCOI was included in their inital IPO filing, allowing them to overstate their financial well-being and trick investors into buying their stocks Upon the company's entry into NASDAQ, Groupon's stocks began selling at $20 a share and rose to $31 During this time, Groupon's total stock value surged from 500 million to 900 million dollars However, when the ASCOI was removed and their revised revenue report revealed that Groupon was losing money, investor confidence for the company plummeted After this revelation, Groupon's stock prices dropped heavily, and by the following year, was trading at $3 a share To this day, public investors have lost over 9 billion dollars while the original shareholders have cashed out over 900 million dollars What happened to their high management? Now if you were investors in Groupon, and you found out their value diminished billions of dollars, what would you do with the management of Groupon? Remember that the founders and early investors of were paid 940 million dollars before Groupon filed their IPO, while they were losing millions of dollars. … Well if I was the owner, I would fire the people responsible. The fact was that in the end no one was really fired, though many high ranking individuals did quit. Rob Solomon was the first to leave in 2011. He was the chief operating officer. Rob’s successor was Margo Georgiadis. Margo Georgiadis joined the company after it had filed their IPO. After less than six months Margo left the company, while having 1.1 million stock options. After Groupon’s IPO, many other management staff left. In the last couple of weeks, the executive board of Groupon is reviewing Andrew Mason, the current CEO of Groupon. They are finally reviewing his ability to manage the company after Groupon's stock plummeted and the demand for their deals diminished. Any Lawsuits? Groupon shareholders have filed lawsuits against Groupon because their IPO was $20 and dropped to an all-time low $3.68. Chief Financial Officer Jason Child and Chief Accounting Officer Joseph Del Preto have been accused of insider trading. Do you think their shareholders were in a position to file suits against Groupon?

And if yes, would you have done it too if you were in their position? What is the plan/future outlook after this accounting scandal? Advice for Companies using Groupon 1. Advertising: create an existing advertising budget to Groupon promotions so they actually make income.

2. Inventory: be sure to compare the commission costs versus inventory carrying costs.

3. Timing: Use Groupon if you need a temporary high cash flow, or for rewarding existing customers. Advice for Groupon 1. Advertising: focus their advertising through emails instead of mobile phones.

2. Focus on Customers: Groupon focused too much on attracting new customers rather than pleasing their existing customers. Thank you For Listening Citations Steiner, Christopher. "Meet The Fastest Growing Company Ever." Forbes. Forbes Magazine, 30 Aug. 2010. Web. 10 Dec. 2012.
Vardi, Nathan. "The Groupon Stock Train Wreck Hits An All-Time Low." Forbes. Forbes Magazine, 02 Nov. 2012. Web. 10 Dec. 2012.
Pavlo, Walter. "Groupon Accounting Scandal, and We're Surprised?" Forbes. Forbes Magazine, 03 Apr. 2012. Web. 10 Dec. 2012
Weil, Jonathan. "Groupon IPO Scandal Is the Sleaze That's Legal." Bloomberg. Bloomberg, 4 Apr. 2012. Web. 10 Dec. 2012.
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Sweet, Scoot. "What You Can Learn From Groupon's IPO Missteps." Inc.com. N.p., 24 Oct. 2011. Web. 1 Dec. 2012. <http://www.inc.com/articles/201110/the-groupon-ipo-how-not-to-go-public.html/>.
Brown, Abe. "Groupon’s Fudged IPO Filings Cast More Doubt on Its Future." Inc Technology. N.p., 27 Sept. 2011. Web. 10 Dec. 2012. <http://technology.inc.com/2011/09/27/groupons-fudged-ipo-filings-cast-more-doubt-on-its-future/>.
Mashable. "The History of Groupon." Forbes. Forbes Magazine, 07 Jan. 2011. Web. 10 Dec. 2012. <http://www.forbes.com/sites/mashable/2011/01/07/the-history-of-groupon/>.
MacMillan, Douglas. "Groupon CEO Mason Tested as Board Members Debate His Future At top." Financial Post. N.p., 29 Nov. 2012. Web. 10 Dec. 2012. <http://business.financialpost.com/2012/11/29/groupon-ceo-mason-tested-as-board-members-debate-his-future-at-top/>.
Chan, Edwin. "Groupon Responds to SEC Inquiry on Accounting." Reuters. Reuters, 2 Nov. 2012. Web. 10 Dec. 2012. <http://www.reuters.com/article/2012/11/02/us-groupon-sec-idUSBRE8A11AD20121102>.
Young JR, Don. "Accounting Issues, SEC Inquiries, All-Time Low in Share Price â Happy Birthday Groupon." Daily Deal Media. Daily Deal Media, 4 Nov. 2012. Web. 10 Dec. 2012.
Popper, Ben. "Batter Up: Groupon Sued by Investors in What Experts Say Is First of Many Lawsuits." VentureBeat. VentureBeat, 4 Apr. 2012. Web. 10 Dec. 2012.
McKenna, Francine. "Groupon: Ernst & Young's Accounting Challenged Client." Forbes. Forbes Magazine, 23 Apr. 2012. Web. 10 Dec. 2012.
CBS. "Shareholder Sues Groupon Over Loss Reporting Scandal." CBS Chicago. CBS Chicago, 13 Apr. 2012. Web. 10 Dec. 2012.
Mitaru, Ilie. "Why Groupon Sucks for Small Businesses." PCWorld. PCWorld, 7 June 2011. Web. 10 Dec. 2012.
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Jacobsson Purewal, Sarah. "Groupon Nightmares (and How to Avoid Them)." PCWorld. PCWorld, 5 Dec. 2010. Web. 10 Dec. 2012.
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