Financial_Restatement_Paper

The stock market is a risky game that investors often play to make money. A smart investor will research and compare different companies to determine if the company if profitable before investing in a particular company. Investors rely on a company’s financial statements to help determine whether or not a company is a good investment. Occasionally because of errors in accounting principles, a company has to restates its financial statements. In October 2008, Overstock.com, Inc. restated its financial reports from for the fiscal year ended December 31, 2003 to September 30, 2008 to correct certain customer refund and credit errors. From the Company’s inception through 2007, the company recorded revenue based on product ship date. Overstock.com determined that it should not record revenue until product delivery date because risk of loss transfers to the customer upon delivery and acceptance (Securities and Exchange Commission, 2008). The company had an internal control problem. Overstock.com issued a statement saying a new computer system was not operating correctly to unsure that all refunds and credits issued to customers and gift cards issued to customers were completely and accurately recorded in the correct accounts. This error caused the revenue and returns expense accounts to be misstated. In the last quarter of 20008, Overstock.com overpaid a vendor and when the overpayment was returned in 2009, Overstock.com recorded overpayment as income. Subsequently on January 29, 2010, Overstock.com yet again had to restate its previously issued financial statements for the fiscal year ended December 31, 2008 (including the interim periods within that fiscal year), and the quarterly periods ended March 31, 2009, June 30, 2009 and September 30, 2009 (Antar, 2010). Overstock.com 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based on the actual three-year vesting schedule rather than a three-year straight line amortization and applied an outdated forfeiture rate in calculating its expense under the plans. Correction of these errors are expected to decrease income for fiscal year 2008 by approximately $350,000, and to decrease income for the nine months ended September 30, 2009 by approximately $900,000 (Ritholtz, 2010). In the last two years, Overstock.com, Inc. has restated its financial statements twice to comply with GAAP. On Overstock.com official website, 2008 financial statements have been restated but 2009 statements have not and no notes are written about the 2009 restatements. By comparing the 2009 Statement of Cash Flows to the restated 2008 Statement it give the impression that there was a $3,650,000 increase in cash from 2008 to 2009 (Overstock.com, 2010). Overstock.com is currently under investigation by the SEC and is in the middle of litigation in California for customer rip-offs. In the last five years Overstock.com has gone through three different auditing companies. After eight years of failed audits, Price Waterhouse Coopers was fired. Followed by the Grant Thornton auditing firm. Grant Thornton was subsequently fired once it recommended Overstock.com restate their 2009 financial statements. Grant Thornton sent a letter to the SEC stating it did not agree with statements concerning their company, which led to a SEC investigation of Overstock.com (Thornton, 2009). Because of the accounting errors going back to 2003, and the two restatements within two years, as an investor one could conclude that this is a company that is not reliable. In conclusion, when a company restates its financial statements due to an error in accounting principles it damages investors’ faith in the reliability of its reports, which in turn can scare away new investors.