Theory in Practice 11.1 Groupon Inc. is a large U.S.-based firm that sells In Novernber 2011, Groupon issued an IPO that discount coupons on the Internet for a wide range attracted great interest from irvestors. Priced at of food and merchandise. The coupons enable the USS20, the shares quickly exceeded S30 in early purchaser to buy these products from local mer- trading. However, the company's accounting issues chants with whom Groupon had negotiated the returned. In April 2012, Groupon reported, in finan- discount price. The company was created in 2008 cial statenents submitted to the SEC, a "material and grew quickly, creating a large customer base. weakness" in internal controls (such reports are From its beginnings, Groupon adopted aggres- required by the Sarbanes-Oxley Act, see Section 1.2). sive accounting practices. For example, it recorded This weakness had allowed a material understate- revenue as the full amount received from cus- ment of expected refunds to customers (Groupon tomers, despite its obligation to pay a significant has a policy of refunding their money to customers portion to the merchants involved. In this way, it who are not satisfied), and forced the company to showed an impressive top line" on its income restate its fourth quarter 2011 financial statenents statement. Recording revenue net of amounts Groupon had done nothing illega-material weak- owed to merchants would have reduced this top nesses, for example, do not have to be reported in IPO prospectuses. Nevertheless, investors suspected The company also emphasized "adjusted con- that managernent must have known earlier about solidated segment operating income (ACSO), the underprovision and resulting profit overstate- a version of pro-forma income (Section 7.11.2) ment but said nothing until forced to reveal it under which marketing costs were capitalized several months following the IPO. These suspicions and amortized rather than deducted as expenses. added to already existing concerns about Groupons Since the company was working hard to build accounting described above. Furthermore, addi up its customer base, it regarded these costs as tional concerns arose that Groupon may have been an investment in its future rather than a current attempting to hide a decline in its customer base. As period expense. In this way, Groupon claimed a result, the company's shares were trading below to be profitable, despite substantial losses on a $5 in late December 2012 increasing to only $12 in line by about 60%. GAAP basis. December, 2013