Monday, May 04, 2009

The Reliable Unreliability of Financial Statements

There are few certainties in this world: gravity, the speed of light, and, more obviously every quarter, the utter unreliability of financial statements.

That became starkly evident today, as white collar crime-fighter Sam Antar released the latest of a series of blog items showing that Overstock has systematically inflated its quarterly financials.

Sam reported:

In Q1 2009, reported a net loss of $2.1 million compared to $4.7 million in Q1 2008 and claimed an earnings improvement of $2.6 million. However, the company's reported $2.6 reduction in net losses was aided by a violation of GAAP (described in more detail below) that reduced losses by $1.9 million and buybacks of Senior Notes issued in 2004 under false pretenses that reduced losses by another $1.9 million.
In other words, you have to deduct $3.8 million from the $2.6 million earnings "improvement," which equals a $1.2 million un-improvement.

Sam lays out a very convincing case of blatant fraud.

What's fascinating are three things:

1) that it happens every quarter,

2) that it is so blatant,

and most importantly,

3) that the SEC knows about it and has done absolutely nothing about it.

The ball is in Mary Schapiro's court. So far, the SEC has demonstrated that it either does not employ competent accountants, or that the SEC has consciously ignored blatant securities law violations at this company.

© 2009 Gary Weiss. All rights reserved.

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