Errors in Overstock's Submissions to SEC: What Do They Signify?

This time it’s outright incompetence and stupidity. Add ineffective Audit Committee oversight, too.

After reading one of the many letters back and forth between the Securities and Exchange Commission Division of Corporation Finance and David Chidester, CFO of Overstock.com (OSTK), I have found many errors in the company's submissions to the SEC. What's worse is that Overstock.com's auditors, PricewaterhouseCoopers LLP, assisted the company in providing erroneous information to the SEC in response to its inquiries about certain company non-GAAP revenue accounting practices and related disclosures.

As detailed below, Patrick Byrne, CEO, has praised the "unbelievable crystal clear view of the business driven" by CFO David Chidester's "information" and Allison H. Abraham, Audit Committee Chairperson, considers PricewaterhouseCoopers LLP's work "to be consistent and of high quality." However, as you will see from the facts presented below, both Patrick Byrne's claims about the quality of David Chidester's data and Allison H. Abraham's claims about the quality of PricewaterhouseCoopers LLP's work are flat out wrong (no surprise).

Before we begin, I need to ask my readers the following questions:

• If a company reports profits and beats Wall Street analysts’ mean consensus earnings expectations, is it considered a positive surprise?

The answer is yes.

• If a company reports a loss that is lower than Wall Street analysts’ mean consensus expectations, it is considered a positive surprise?

The answer is yes.

• If a company reports a loss that is higher than Wall Street analysts’ mean consensus expectations, it is considered a negative surprise?

The answer is yes.

• If a company beats Wall Street analysts’ mean consensus expectations when it reports profits in one quarter while in another quarter the same company reports losses lower than Wall Street analysts’ mean consensus expectations are both quarters considered as positive surprises?

The answer is yes, except in the insane, inept, incompetent, and unprincipled world of Overstock.com and to borrow a phrase from a well respected blogger Jeff Matthews, “I am not making this up.”

Here we go again. Every time I try to find the answer to a simple question about Overstock.com, I find new problems with the company's disclosures (no surprise). This time I found erroneous information submitted by Overstock.com in a letter to the SEC Division of Corporation Finance. And I just began reading this stuff!

Securities and Exchange Commission Division of Corporate Finance reviews Overstock.com revenue accounting practices and disclosures

As detailed in my last blog post, the Securities and Exchange Commission Division of Corporation Finance released its correspondence with Overstock.com regarding their examination of certain company revenue accounting practices and related financial disclosures. A few months earlier, in January 2008, the SEC discovered that Overstock.com’s revenue accounting was intentionally not in compliance with GAAP and the company’s own revenue recognition disclosures dating as far back as fiscal year 2000.

Overstock.com CFO David Chidester submits erroneous information to the SEC

In a letter to the SEC dated February 26, 2008 David Chidester, Senior Vice President of Finance and a CPA, provided Overstock.com's quantitative materiality analysis of revenue accounting errors effecting both previously reported revenues and earnings per share, dating back to Q1 2004 (see page 15).

In one chart, Mr. Chidester compared Wall Street analysts’ mean consensus expectations for earnings per share for Overstock.com against the company’s previously reported non-GAAP earnings per share for fiscal year quarters from 2004 to 2007. Likewise in that chart, he compared Wall Street analysts’ mean consensus expectations for earnings per share for Overstock.com against the company's purportedly corrected changes to GAAP earnings per share for fiscal year quarters from 2004 to 2007. Selected information from Overstock.com’s earnings per share [EPS] materiality analysis is presented below (from page 15 of Overstock.com's letter to the SEC):

Note: Overstock.com's adjusted earnings per share figures above do not reflect later corrections (see comment 3) required by the SEC to make them in compliance with GAAP. The tables provided by Overstock.com in response to questions by the SEC were not revised by the company.

In Q4 2004, Overstock.com reported that non-GAAP and purported GAAP earnings per share beat Wall Street analysts’ mean consensus expectations and the company considered its financial performance as positive surprises of 50.00% and 39.24%, respectively. Correct so far.

In the next quarter, Q1 2005, Overstock.com reported that non-GAAP and purported GAAP losses per share were higher than Wall Street analysts’ mean consensus expectations and the company considered its financial performance as positive surprises of 83.33% and 90.89%, respectively. How can Overstock.com report higher than expected earnings in one quarter (Q4 2004) and higher than expected losses in another quarter (Q1 2005) and yet consider both quarters’ financial results as positive surprises?

In the following quarter, Q2 2005, Overstock.com reported that non-GAAP and purported GAAP losses per share were lower than Wall Street analysts’ mean consensus expectations and the company considered its financial performance as negative surprises of 54.55% and 63.82%, respectively. How can Overstock.com report lower than expected losses one quarter (Q2 2005) and consider its financial performance as a negative surprise while reporting higher than expected losses in another quarter and consider its financial performance a positive surprise?

David Chidester's errors are repeated over and over again in his earnings per share materiality analysis chart submitted to the SEC.

Here is where this gets really insaaaaane!!!!!

Before we continue, I will ask two more questions:

• If a company beats Wall Street analysts’ mean consensus quarterly revenue expectations and at the same time reports losses per share higher than Wall Street expectations, is that company's revenue performance considered as a positive surprise and its earnings performance considered as a negative surprise?

The answer is yes, except of course, in the world of Overstock.com.

• If a company beats Wall Street analysts’ mean consensus quarterly revenue expectations and in the same quarter reports losses per share below Wall Street expectations, are both revenue and earnings performance considered as positive surprises?

The answer is yes, except again, in the world of Overstock.com.

Now here is where it gets really insane. In another chart, David Chidester compared Wall Street analysts’ mean consensus expectations for revenues against both the company’s previously reported non-GAAP revenues and purported GAAP revenues for fiscal year quarters from 2004 to 2007. In that chart, he got Overstock.com's revenue surprises right.

For example, in each of the quarters detailed above (Q4 2004, Q1 2005, and Q2 2005), Overstock.com's previously reported non-GAAP revenues and the purported GAAP revenues beat Wall Street analysts’ mean consensus expectations and the company considered its financial performance as positive surprises. However, in those same quarters, Overstock.com's positive revenue surprises conflict with its earnings per share surprises as detailed above. See the chart below from page 15 of Overstock.com's letter to the SEC.

Note: Revenue amounts in $ millions. Overstock.com's adjusted revenue figures above do not reflect later corrections (see comment 3) required by the SEC to make them in compliance with GAAP. The tables provided by Overstock.com in response to questions by the SEC were not revised by the company.

In Q1 2005, Overstock.com reported that non-GAAP and purported GAAP revenues beat Wall Street analysts’ mean consensus expectations and the company considered its financial performance as positive surprises of 16.51% and 15.01%, respectively. However, in that same quarter, Overstock.com reported that non-GAAP and purported GAAP losses per share were higher than Wall Street analysts’ mean consensus expectations and the company considered its financial performance as positive surprises of 83.33% and 90.89%. How can Overstock.com consider beating revenue expectations as a positive surprise and in the same quarter consider reporting of wider than expected losses as a positive surprise, too?

In Q2 2005, Overstock.com reported that non-GAAP and purported GAAP revenues beat Wall Street analysts’ mean consensus expectations and the company considered its financial performance as positive surprises of 2.41% and 4.29% respectively. However, in that same quarter, Overstock.com reported that non-GAAP and purported GAAP losses per share were lower than Wall Street analysts’ mean consensus expectations and the company considered its financial performance as negative surprises of 54.55% and 63.82%. How can Overstock.com consider beating revenue expectations as a positive surprise and in the same quarter consider reporting of lower than expected losses as a negative surprise?

A legitimate question can be raised: should we add incompetence, carelessness, and stupidity to the list of Overstock.com’s unprincipled management team’s lies, deceptions, false statements and misleading disclosures, inconsistencies, contradictions, and hype, too? The short answer is yes.

The company's CFO, David Chidester, must have his head screwed on backwards. However, during Overstock.com's recent annual meeting of shareholders held on May 13, Patrick Byrne praised the quality of David Chidester's data:

A big part of this turn around has been enabled by super granular data Dave ...has made available to us. He has put to use all of this great technology we built and we have just an unbelievably crystal clear view of the business driven by David's information.

[Note: Bold print and italics added by me.]

Patrick Byrne's claims about the quality of David Chidester's work are utter nonsense. As the CFO of Overstock.com, David Chidester permitted the company to report revenues in deliberate non-compliance with GAAP. In addition, David Chidester provided erroneous responses to information requested by the SEC Division of Corporation Finance. The double talking CEO of Overstock.com must have his head screwed on backwards, too (no surprise).

Did PricewaterhouseCoopers LLP, Overstock.com's auditors, review this stuff? The short answer is yes and they apparently missed David Chidester's errors. (I am just a tiny bit surprised.)

PricewaterhouseCoopers assisted Overstock.com in responding to SEC inquiries while the Audit Committee provided the oversight

According to Overstock.com's latest proxy statement:

Audit Fees

The aggregate fees and out-of-pocket expenses PricewaterhouseCoopers LLP billed us for each of the last two fiscal years for professional services for the audits of our annual financial statements, the effectiveness of internal control over financial reporting and reviews of financial statements included in our Reports on Form 10-K and Form 10-Q and for their services assisting us with our responses to accounting comments from the Staff of the SEC and to the SEC's investigation into our accounting and other matters were $611,000 in 2006 and $761,000 in 2007.

[Note: Bold print and italics added by me.]

PricewaterhouseCoopers LLP received $150,000 in higher fees from Overstock.com compared to the previous year in large part to assist the company in responding to inquiries from the SEC. On May 13, 2008, during the annual meeting of Overstock.com shareholders, Audit Committee Chairperson Allison H. Abraham praised the work of PricewaterhouseCoopers LLP:

The Audit Committee has had substantial opportunity to evaluate the work of PricewaterhouseCoopers and has found it to be consistent and of high quality.

[Note: Bold print and italics added by me.]

Allison H. Abraham's evaluation of PricewaterhouseCoopers LLP is utter nonsense, too. PricewaterhouseCoopers LLP either missed Overstock.com's deliberate noncompliance with GAAP in reporting revenues or colluded with the company to report non-GAAP revenues. In addition, PricewaterhouseCoopers LLP helped Overstock.com provide erroneous responses to information requested by the SEC Division of Corporation Finance.

What's worse is that despite Overstock.com's deliberate noncompliance with GAAP in revenue reporting and errors in responses to the SEC, under PricewaterhouseCoopers LLP's supposedly watchful eye, Allison H. Abraham claims that "The Audit Committee has had substantial opportunity to evaluate the work of PricewaterhouseCoopers and has found it to be consistent and of high quality."

Allison H. Abraham was a member of Overstock.com's Audit Committee last year, too, when the company made the following disclosure in its proxy statement:

The Audit Committee has reviewed and discussed with management and the independent registered public accounting firm (i) the consolidated financial statements for each of the three years in the period ended December 31, 2006, (ii) management's assessment of the effectiveness of the Company's internal control over financial reporting as of December 31, 2006, (iii) PricewaterhouseCoopers LLP's evaluation of management's assessment of the effectiveness of internal control over financial reporting as of December 31, 2006, and (iv) PricewaterhouseCoopers LLP's evaluation of the effectiveness of the Company's internal control over financial reporting as of December 31, 2006. Management has represented to the Audit Committee that the Company's consolidated financial statements were prepared in accordance with generally accepted accounting principles.

[Note: Bold print and italics added by me.]

Apparently, Overstock.com's Audit Committee took management's word that "the Company's consolidated financial statements were prepared in accordance with generally accepted accounting principles," even though it is clear that management intentionally reported revenues in noncompliance with GAAP and its own revenue recognition disclosures in violation of Securities and Exchange Commission Staff Accounting Bulletin No. 99, No. 101, and No. 104.

I'll ask these questions: Who do you trust more to review Overstock.com's disclosures - CFO David Chidester, PricewaterhouseCoopers LLP, or this convicted felon blogger? Do you trust Overstock.com's Audit Committee's ineffectual oversight of the company's oversight of the Company's financial reporting, internal control and audit functions?

Considering the pattern of lies, deceptions, false statements and misleading disclosures, inconsistencies, contradictions, and hype by Overstock.com's unprincipled management team detailed in this blog and other blogs, I am skeptical that David Chidester, PricewaterhouseCoopers LLP audit team, or Overstock.com's Audit Committee are willing, able, and competent enough to handle their functions and responsibilities.

In the mean time I suggest that David Chidester (CFO and a CPA) purchase the “Accounting for Dummies” book by John A. Tracy, on sale at Overstock.com for $10.65. Mr. Chidester can use a little remedial education in accounting. I suggest that each member of Overstock.com's Audit Committee purchase the "Sarbanes-Oxley for Dummies" book by Jill Gilbert, on sale at Overstock.com for $14.20. Overstock.com's Audit Committee needs to carefully study their responsibilities under the Sarbanes-Oxley Act.

PricewaterhouseCoopers LLP employees need to pay more attention while attending continuing education classes. Otherwise, they will suffer the same fate that Arthur Anderson received as a result of its audits of Enron.

Finally, I respectfully advise the SEC Division of Corporation Finance to carefully re-examine Overstock.com's lawyered up and sanitized disclosures to you, before this convicted felon blogger takes the company's disclosures apart any further.

I suggest that you start by requiring Overstock.com to provide a new and accurate detailed quarter by quarter materiality analysis of the company's revenue accounting errors and related disclosures dating back to day one. Did you notice the relative lack of detailed information provided by Overstock.com in its materiality analysis for fiscal quarters and years 2004 and earlier?

In addition, please require Overstock.com to re-adjust its quarterly revenue, cost of goods sold, gross margins, net income or (loss) and earnings per share numbers in its materiality analysis to reflect your corrections (see comment 3) to bring them in compliance with GAAP.

If both CFO David Chidester and PricewaterhouseCoopers LLP audit team cannot get a simple earnings surprise disclosure right and Overstock.com's Audit Committee is unable to provide effective oversight of the Company's financial reporting, internal control and audit functions, imagine what else they screwed up royally on. I'll have plenty to say about that soon.

To be continued…..

Note: For other up to date coverage of issues on Overstock.com, please read Gary Weiss and Tracy Coenen's blogs.

Disclosure: Not long or short Overstock.com.

Comments

[User 195672]

Great...um...article Sam!
I will cover my short position when this @ 8.
O.K. Sammy.

[Patchie]

Byrne doesn't sound so crazy when you listen to those deep in the know;

Anand K. Ramtahal, VP, FINRA

"I don’t know how to fight off an aiding and abetting charge when a customer misrepresents to you and you really do nothing to track the underlying fails that result from that misrepresentation. You have to seriously think about the aiding and abetting violation that is in the regulation right now so it’s, you know, really the Commission is moving in a different direction when it comes to regulation—Regulation SHO and growth of the other issues around Regulation SHO. And quite frankly I can tell you from where I sit, I mean, there is a lot going on, I was talking to my fellow panelists this morning, on the Hill, in Washington, around Regulation SHO. So we can expect to see a lot more in the way of rule making and amendments to this regulation as we move forward. So, the regulation was adopted in January 2005, but there is a lot of discussion around misrepresentation and peripheral issues wherein short and long sales have failed to deliver."


investigatethesec.com/...

It is too bad Sam, Tracy Coenen, Gary Weiss, Herb Greenberg, et. al. never seek to understand these issues Byrne has spoken of. Clearly others of more significance have taken note.

[grza29]

I read a little of this article, but thought it could use more bolds, italics, and brackets.

A few things:
- stock valuation doesn't include inputs for analyst expectations.
- how would you know what the consensus analyst expectation is anyway? As in what defines an analyst? Couldn't be just sell-side research, because they don't make buy / sell decisions for mutual funds. Also, did the consensus analyst expectation include Sam Antar's estimate? His very accurate estimates of negative infinite per quarter, would bring down the consensus, and make the surprise even higher.
- What's the consensus estimate on Sam Antar's IQ? Over/under 100?