On December 30, 2009, Overstock filed an 8-K with the SEC disclosing that it had hired KPMG as its new audit firm. Overstock filed another 8-K on February 4, 2010, quietly announcing that it intended to restate its prior financial statements for 2008 and for each of the first three quarters of 2009. The 8-K indicated that those prior financial statements should not be relied upon and that the restated financial statements would be released as soon as practicable.

The items that required correction in Overstocks prior financial statements included overpayments made to certain of the companys business partners; the $785,000 overpayment that had been central to the dispute between Grant Thornton and Overstock was not identified separately. The company admitted the gain contingency accounting applied to those overpayments had been determined to be inappropriate. According to the 8-K, Correction of these errors is expected to shift approximately $1.7 million of income recognized in fiscal 2009 back to fiscal year 2008.

Overstocks promised financial restatements were included in SEC filings made by the company on March 31, 2010. One week later, Overstock issued a press release reporting that it had received a letter from the NASDAQ. The letter indicated that following the filing of the restated financial statements with the SEC, the company was in compliance with the NASDAQs listing rules. In April 2012, the SEC notified Overstock that its investigation of the companys accounting affairs initiated in October 2009 had been completed. The SEC informed Overstock that it would take no enforcement action against the company as a result of that investigation.

After reporting a $7.7 million net income for 2009, its first-ever annual profit, Overstock reported a significant net income in four of the following five years, the exception being 2011. During that five-year period, the companys annual revenues steadily increased, reaching almost $1.5 billion in 2014. Overstock did not restate any prior financial statements during that time frame and KPMG issued an unqualified opinion each year on the companys financial statements. Patrick Byrne remains the companys CEO at last report.

Questions

1. The Overstock-Grant Thornton dispute was publicly aired via disclosure statements filed with the SEC. What impact do you believe those disclosures had on the investing publics confidence in the financial reporting domain and the independent audit function? Were the interactions between Overstock and Grant Thornton unprofessional or otherwise inappropriate? Explain.

2. Do you believe that the $785,000 amount at the center of the Overstock-Grant Thornton dispute was material? Defend your answer. What factors other than quantitative considerations should have been considered in deciding whether the $785,000 amount was material?

3. Briefly compare and contrast the nature and purpose of an independent audit versus a quarterly review.

4. The SEC requires registrants to have their quarterly financial statements reviewed by an independent accounting firm but does not mandate that a review report be included in a Form 10-Q. Under what circumstances must a review report accompany quarterly financial statements in a 10-Q? Why doesnt the SEC routinely require public companies to include their review reports in their 10-Q filings?

5. What is the purpose or purposes of Form 8-K filings by SEC registrants? What specific items of information must be included in an 8-K that announces a change in audit firms?

6. Do you agree with the accounting treatment that Overstock typically applied to the revenues generated by its Partner line of business? Why or why not?