Financial Statement Restatement Paper
It is well known that over the past decade the amount of errors being discovered within the financial statements of publically held companies has risen. One such error was announced by the internet sales company Overstock. com in early 2009. Due to an accounting error, partners of the company were under billed by $1. 8 million dollars over the course of 2008.
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Overstock chose to record this entry incorrectly which falsely ballooned the company’s revenues; in turn, causing them to record an incorrect profit of $1. million for the year ended December 31, 2008. Had this entry been booked correctly and within the guidelines of the generally accepted accounting principles (GAAP), Overstock would have recorded its earnings correctly, showing a loss of $0. 8 million. To make matters indefinitely worse; this was the second issue dealing with Overstocks financials in less than six months.
Chris Kanaracus of the Journal, Computerworld, stated that problems had risen with Overstocks software and network provider Oracle in which Overstock employees did not properly hook up certain wires and when manually trying to fix the issue, some of these “wires” were verlooked. These seemingly small issues turned into a rather large problem that caused Overstock to have to restate its financials all the way back to 2003. For the restatement of the year-end 2008 financials, several accounting principals were violated. First is the principle of revenue recognition.
The revenue recognition principal states that revenue must be recognized in the period the product or service is sold or rendered. Since the partners should have been billed in previous periods, the prior period statements should have been adjusted to show this change. Another rincipal not adhered to was the principal of conservatism. Conservatism, in general, states that when two or more options are available for recording an accounting transaction, the more conservative route be taken. In Overstocks case there were two options; the right way and the wrong way.
Overstocks management made a bad choice and definitely not one that lingered anywhere near the conservative side. SEC Staff Accounting Bulletin No. 99 has several criteria that list whether or not a transaction should be deemed material and corrected amongst the prior period statements. Some of this criteria is; 1) whether the misstatement masks a change in earnings or other trends, 2) whether the misstatement hides a failure to meet analysts’ consensus expectations for the enterprise and 3) whether the misstatement changes a loss into income or vice versa.
It is clear that the transaction to correct the forgotten billings in the amount of $1. 8 million should have, without a doubt, been recorded in the prior period financials in which the billings should have taken place. This error along with the mistakes of Overstocks staff when implementing its oftware has caused much distrust in the public eye regarding the company as a whole. Stock prices have fallen and for that, the stockholders’ have paid dearly.
Todays economy is unkind to that of companies who abuse its investors trust. the general accounting standards this country has put into place and management that will adhere to these standards and ensure the company’s financials remain free from misstatement going forward.