Accounting fraud is crucial to any company. It can cause a company’s downfall or closure. For the past five years, there have been several companies that were involved in accounting scandal and one of them is Groupon Inc. The said company connects the merchant and the customer to provide goods and services at a discount (Securities and Exchange Commission, 2011). This paper will discuss Groupon’s accounting fraud in 2011 and 2012 and the legal and financial liabilities concerning the Fraud.
A Venturebeat news article dated November 3, 2012 noted various accounting fraud applied in Groupon’s financial statement. The company had its initial public offering) on November 4, 2011 at an initial price of USD 20 per share (Pavlo, 2012).
The Venturebeat article stated that Groupon started having accounting fraud when it applied a method, Adjusted Consolidated Segment Operating Income. Groupan has adjusted its financial statement several times during the year 2011. It claimed to have USD 81.6 million profits in the first quarter of 2011 using the method of Adjusted Consolidated Segment Operating Income. However, through the use of normal accounting metric, it was revealed that the company lost USD 98.3 million (Agrawal, 2011).
The second instance was reporting financials based on gross. Such let to the provision of company’s revenue was USD 644.47 million which was changed to USD 295 million in its second quarter. The company has also redefined the metrics including key expense, cost of revenues, and selling general and administrative costs (Agrawal, 2011).
Relying on such questionable changes led to the legal proceedings regarding the issues. Reuter’s news article noted that Groupon’s directors and auditors were challenged with various lawsuits. Groupon defended in the article that the refund rate of the customers increased which led to adjustments in the financial data. The managers have also asked the auditors to look on the financial weakness and promised to improve their operation (Aubin. 2011).
Based on the information presented above we can conclude that the company violated the accounting principles on revenues data where in adjustment continued to raise questions as the total revenue in third quarter does not reflect the correct sum of the revenues claimed from first quarter to third quarter. Groupon has also violated the principles of accounting transparency as all metrics were presented before deductions. Further, it has redefined the metrics of accounting, which made the financial reporting looks more defensive on its financial weakness.
Tzung-Yuan Hsieh (2011) of the Department of Finance, Ming Dao University in Taiwan noted in his research that transparency has an impact in the financial reporting of the companies. Firms with higher financial transparency proved too have better quality of financial statements. In the case of Groupon, the lack of transparency resulted not only to poor quality of financial reporting, but also became questionable and legally liable.
Managers and auditors are equally responsible for the misrepresentation and the lack of transparency in the financial reporting. A study of Hawariah Dalniala and his colleagues (2014) entitled Accountability in financial reporting: detecting fraudulent firms revealed that managers can manipulate accounting records and can be motivated to understate assets and liabilities.
Similarly, the Association for Financial Professionals noted that accounting fraud usually occurs when a company overstates its assets or revenues and usually are committed by the corporate officials to realize a projected earning goal (Tinker, 2015). A New York Times article in 2002 stated that auditors should also be liable as they are paid and responsible for reviewing corporate books or financial records (Glater et.al, 2002).
The Sarbanes Oaxley Act mandates the disciplinary and financial sanctions to the firms engaged in accounting fraud. Such sanctions are executed by the Public Company Accounting Oversight Board. Currently, the latter government agency provides USD 100,000 to UASD 15 million financial sanctions for accounting fraud violators depending on the profile, experience, and capacity of the person (Win, 2012).
Aside from the mentioned sanctions, the Public Company Accounting Oversight Board should apply precautionary sanctions that can prevent the companies from engaging in accounting fraud. Among the possible sanctions that it can adapt are pre-evaluation sanctions wherein the office can conduct evaluation of the financial information for possible frauds before getting the information in to public access and post evaluation sanction when a company will pay higher amount when found guilty of possible accounting fraud risk.
Such sanctions can prevent damages to the investors as the evaluating committee of the government can already gate keep the possible fraudulent information that may cause financial loss to investors and to the firm, itself. Other sanctions can be applied is the sanction for the possible conspiracy between the private companies and the government for making fraudulent financial information public. Such means that the evaluating committee became negligent of their responsibility or connived with the private sector to publish false financial claims.
Pavlo, Walter. April 3, 2012. Groupon Accounting Scandal and We're Surprised? Forbes. Retrieved from http://www.forbes.com/sites/walterpavlo/2012/04/03/groupon-accounting-scandal-and-were-surprised/
December 31, 2011. Groupon Inc. Securities and Exchange Commission. Retrieved from http://www.sec.gov/Archives/edgar/data/1490281/000149028113000008/groupon201210-k.htm
Agrawal, Rocky. November 3, 2012. How Groupon’s accounting changes hide what’s really going on at the company. Venture Beat. Retrieved from http://venturebeat.com/2011/11/03/groupon-accounting-changes/
Aubin. Dena. November 4, 2011. Analysis: Groupon accounting problems put spotlight on board. Reuters. Retrieved from http://www.reuters.com/article/2012/04/12/net-us-groupon-board-idUSBRE83B0F920120412
Hsie, Tung Yuan. 2011. Do the results of information transparency reflect firms’ accounting quality? Department of Finance, Ming Dao University, Taiwan retrieved from http://www.academicjournals.org/article/article1380528277_Hsieh.pdf
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