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All this finger shaking is misplaced. Groupon's accounting was legitimate as a management accounting approach, and any savvy investor should have realized this

All this finger shaking is misplaced. Groupon's accounting was legitimate as a management accounting approach, and any savvy investor should have realized this. Do you think that Google's acquisition offer was naive to the basic accounting approach used by the firm? Of course it wasn't. The knee-jerk criticisms of Groupon's accounting are coming from the same naive viewpoint as those who demanded mark-to-market accounting practices (which helped trigger the housing crash). The use of accounting to measure business valuation is more an art than a science, and no savvy person should be fooled either by a firm's decision not to mark the price of an asset to market or to consider ramp-up costs temporary. If you're thinking of investing, be sure you understand how the accounting works and that you are comfortable with why management is doing it that way. There is no reasonable way to compare two companies in different industries using a standardized accounting method. Even GAAP is not designed to do that. It's a nuance of business valuation and ultimately in the case of a company like GroupOn the valuation is mostly due to what investors are willing to pay. And yes, it's reasonable for a firm to choose one accounting approach over another b/c it makes the company easier to manage, or b/c it makes it easier to show the company's true strengths to the market (aka investors).

jonknee 15y ago
> any savvy investor should have realized this That's why the SEC moved on this. It shouldn't take a savvy investor to try and catch phony accounting for a public company. They're selling on commission and counting the total sale as revenue, I'm not sure what kind of third rate accountant would suggest that unless tasked with pumping up the appearances of revenue. A pretty good comparison industry is ticketing. A ticket distributor like TicketMaster sell tickets on commission but collects the cash and pays out to the business owners who were selling the ticket. Like Groupon, TicketMaster holds onto the cash for a while (easier to do refunds and what not if something happens to the event). Guess how TicketMaster books revenue? They only count their commission. The total value of tickets sold is reported, but called "Gross value of tickets sold" and never mentioned other than to be able to show how their commissions are doing.
brown9-2 15y ago
Mark-to-market helped trigger the housing crash? Really? Or is it that having to mark assets at their current value revealed that much of the bank's holdings were worthless, which in turn led to the banking crash?
- grandalf 15y ago
  Your proposed explanation is a very incomplete version of what was actually going on. It depends on what the purpose of the assets was on a company's books. In some cases marking to market makes sense and in others it doesn't. In the case of assets used as reserves (companies are allowed to use securities as reserves for underwriting risk) marking to market means that when the underlying commodity has a bubble, the firm suddenly has significantly greater ability to take risk... then if the asset price falls the firm is suddenly way over-extended. If a firm is responsibly underwriting its own risks, the firm's accountants will determine which assets are suitable and which are not. However in a heavily regulated, heavily subsidized financial system like the US, firms have an incentive to take the maximum risk allowed by law, with the expectation of below market rate loans or other bailout assistance if the practice turned out (in hindsight) to be too risky. In the post financial modernization act boom, firms found ways to treat all kinds of risky assets into reserves, and regulators believed that it was nearly impossible that housing prices would fall more than a few percent. The cabal of large firms and regulators squeezed additional returns out of various schemes for a few years, while shoving significant systemic risk (all built upon the assumption that housing prices would not fall significantly) into the corners and tranches of all sorts of complex products. I'd argue that any complex financial system will ultimately result in coordination to ignore inconvenient systemic risk.
  - jonknee 15y ago
    > If a firm is responsibly underwriting its own risks, the firm's accountants will determine which assets are suitable and which are not. However in a heavily regulated, heavily subsidized financial system like the US, firms have an incentive to take the maximum risk allowed by law, with the expectation of below market rate loans or other bailout assistance if the practice turned out (in hindsight) to be too risky. And yet there were systemic failures before the financial industry was heavily regulated (that's why there is regulation in fact!). It turns out people are greedy and left alone or regulated will still make risky decisions to try and squeeze out more money.

jonknee 15y ago

> any savvy investor should have realized this That's why the SEC moved on this. It shouldn't take a savvy investor to try and catch phony accounting for a public company. They're selling on commission and counting the total sale as revenue, I'm not sure what kind of third rate accountant would suggest that unless tasked with pumping up the appearances of revenue. A pretty good comparison industry is ticketing. A ticket distributor like TicketMaster sell tickets on commission but collects the cash and pays out to the business owners who were selling the ticket. Like Groupon, TicketMaster holds onto the cash for a while (easier to do refunds and what not if something happens to the event). Guess how TicketMaster books revenue? They only count their commission. The total value of tickets sold is reported, but called "Gross value of tickets sold" and never mentioned other than to be able to show how their commissions are doing.

brown9-2 15y ago

Mark-to-market helped trigger the housing crash? Really? Or is it that having to mark assets at their current value revealed that much of the bank's holdings were worthless, which in turn led to the banking crash?

grandalf 15y ago
Your proposed explanation is a very incomplete version of what was actually going on. It depends on what the purpose of the assets was on a company's books. In some cases marking to market makes sense and in others it doesn't. In the case of assets used as reserves (companies are allowed to use securities as reserves for underwriting risk) marking to market means that when the underlying commodity has a bubble, the firm suddenly has significantly greater ability to take risk... then if the asset price falls the firm is suddenly way over-extended. If a firm is responsibly underwriting its own risks, the firm's accountants will determine which assets are suitable and which are not. However in a heavily regulated, heavily subsidized financial system like the US, firms have an incentive to take the maximum risk allowed by law, with the expectation of below market rate loans or other bailout assistance if the practice turned out (in hindsight) to be too risky. In the post financial modernization act boom, firms found ways to treat all kinds of risky assets into reserves, and regulators believed that it was nearly impossible that housing prices would fall more than a few percent. The cabal of large firms and regulators squeezed additional returns out of various schemes for a few years, while shoving significant systemic risk (all built upon the assumption that housing prices would not fall significantly) into the corners and tranches of all sorts of complex products. I'd argue that any complex financial system will ultimately result in coordination to ignore inconvenient systemic risk.
- jonknee 15y ago
  > If a firm is responsibly underwriting its own risks, the firm's accountants will determine which assets are suitable and which are not. However in a heavily regulated, heavily subsidized financial system like the US, firms have an incentive to take the maximum risk allowed by law, with the expectation of below market rate loans or other bailout assistance if the practice turned out (in hindsight) to be too risky. And yet there were systemic failures before the financial industry was heavily regulated (that's why there is regulation in fact!). It turns out people are greedy and left alone or regulated will still make risky decisions to try and squeeze out more money.