Groupon’s I.P.O. promises to be one of the biggest Wall Street events of the year. Initially pegged at a $30 billion valuation, it may float (okay sink) to as low as $10 billion. A $20 billion swing? That’s real money. Was it a simple misreading of the market that led to this error? What about a typographical or clerical error?
Nope, it was old school accounting shenanigans; namely deceptive and misleading accounting practices. “Hey cut them some slack, they are new and inexperienced and too busy creating a new market.” Yeah, well their underwriters, grown-ups you’ve heard of like Goldman Sachs, Morgan Stanley, and Credit Suisse— they should know better.
Wrong. They overlooked glaring and large-scale improprieties in Groupon’s methodology. Specifically, Andrew Sorkin writes that Groupon used a made up accounting gimmick called Consolidated Segment Operating Income that allowed the company to account for income without accounting for several expenses. Hmmmm…. The underwriters let that one slide too. Fortunately, however, the SEC (the post-Madoff SEC) picked up on the move and Groupon has since amended its accounting procedures.
What’s really going on here? “There’s a ton of money to be had,” according to Lynn Turner, a former chief accountant at the S.E.C. Forget Groupon for a moment; the underwriters, who used to play an important role in only financing companies whose books were in line and whose financial stability was credible, have turned into “just a sales and marketing agent” (to quote Mr. Turner again). And you can be sure, regardless of Groupon’s final valuation, all of the underwriters stand to add quite a substantial sum to their bottom lines.
Groupon is great. And they may still revolutionize the interaction between online and brick-and-mortar businesses, but do it the right way. No need to rely on what are nothing more than cheap carnival tricks.
Assisted by Zachary A. Kady