The Bidz.com (BIDZ) saga has taken on a new twist Friday.
Sam Antar, the former CFO of Crazy Eddie, has posted a detailed analysis of the inventory accounting policies reported by Bidz.com - and contends the company is not compliant with GAAP.
Antar describes himself on his blog as “a convicted felon who helped mastermind one of the largest securities frauds uncovered in the 1980’s” - his brother is Crazy Eddie namesake Eddie Antar. He’s transformed himself into a crusader against corporate malfeasance; his blog is called White Collar Fraud.
Antar takes issue with two of the companies’ inventory accounting policies.
One, he notes that BIDZ discloses “We record reserves against our inventory equal to the difference between the cost of inventory and the average selling price that is lower than cost for inventory that is held for less than one year.”
Antar says that policy “does not seem to be in compliance with GAAP.”
BIDZ.com cannot use “the difference between the cost of inventory and the average selling price” in valuing its inventory. Average selling price is not net realizable value, since it does not deduct the cost of completion and disposal of inventory. Therefore, in this specific case, inventory may be overstated. Even if BIDZ.com were to use net realizable value, the company could only use such a measure if the current replacement cost of inventory is greater than its net realizable value.
Antar also notes that BIDZ in 2006 and 2007 “recorded reserves for obsolete and slow moving inventory of 100% of the value of inventory held for more than one year.”
Antar writes that “here too, the company’s inventory disclosure does not seem to be in compliance with GAAP.”
The lowest amount that inventory can be valued at is net realizable value (estimated selling price less cost of completion and disposal) minus normal profit margins. It seems that BIDZ.com’s method of valuing inventory over one year old is arbitrarily based on the amount of time that the inventory is held, rather than the application of GAAP. Unless such inventory cannot be sold under any and all circumstances, BIDZ.com cannot “record reserves of 100% of the cost of inventory held more than one year.” Therefore, in this specific case, inventory may be understated.
What does it all mean? Well, that’s not clear. Is the company innocently misapplying accounting standards? Are they manipulating their inventory to show better financial results? Is Antar misintepreting the company’s disclosures? Hard to say. But clearly Antar the white-collar crime specialist smells something foul.
BIDZ Friday is off 48 cents, or 5.9%, at $7.60.