Overstock.com's accounting restatement and GAAP violations

Overstock.com (the "Company") recently received some negative publicity because the Company made some decisions regarding GAAP, internal accounting policies and their relationship with external auditors that has now caused the company to have to restate their published financial statements going back to 2008. The core issues were "Overstock.com improperly deferred income that it earned but under-billed its fulfillment partners during prior reporting periods (Q3 2008 and before) by moving such income to future reporting periods (Q4 2008, Q1 2009, Q2 2009, and Q3 2009). In other words, Overstock.com took income that should have been reported in prior reporting periods (Q3 2008 and before) and moved it to future reporting periods (Q4 2008 and later) to materially overstate its financial performance in those later reporting periods." (Anatar, 2010) and "The Big O. also admitted that it "incorrectly amortized the expense related to restricted stock units based on the actual three-year vesting schedule rather than a three-year straight line amortization and applied an outdated forfeiture rate in calculating its expense under the plans." While they were at it, they threw a bunch of other corrections that were "[not] material either individually or in the aggregate," as the saying goes." (Newquist, 2010)

When an accounting error reaches this magnitude, it generally involves a number of top-level company officials in both the executive and accounting departments. The core responsibility of the accounting department is to provide managers and investors with information to make decisions. Management is responsible for the financial statements of a company.

The impact of the first point, which is the most material and important, is a blatant attempt of the Company to publish misleading financial statements. In effect, Overstock.com violated GAAO by creating an illegal cookie jar reserve to materially inflate future earnings or reduce future losses from Q4 2008 to Q3 2009. Overstock.com ridiculously claimed that the collection of the entire amount of its under-billings (every single penny) "was not assured" and instead falsely claimed that a "gain contingency" existed rather than make a reasonable estimate of uncollectable amounts as required under SFAS No. 5. Therefore, Overstock.com improperly recognized income from under-billed fulfillment partners as amounts due to the company were collected on a non-GAAP cash basis, rather when they were earned under accrual accounting or GAAP. (Anatar, 2010)