Accounting Changes

After corporate scandals by Enron, WorldCom, Tyco and Adelphia were exposed, the amount of financial restatements began to increase, no doubt a by-product of financial housecleaning done to restore investor confidence. Whether a business is large or small will not exempt them from errors. The reasons for a financial restatement can vary, but most occur because of the detection of accounting errors, weaknesses in internal controls, or regulatory changes. For the purposes of this paper, the focus will be on accounting errors and weaknesses in internal controls.

In 2008, the internet retailer Overstock.com announced it would be restating its financial statements for a five-and-a-half-year period (IT World, 2008). In the follow sections, this paper will explore the reasons for the restatement and the impact to the financial results, the responsibility management has to investors and stakeholders, the expected changes by leadership to internal controls and/or accounting principles, and the impact to the trustworthiness of said leadership personnel.

Discuss the primary reason for the restatement and the impact to the financial results for the company you selected.

In 2008, Overstock.com announced for the second time in two years that they would be restating their financials to comply with generally accepted accounting principles (GAAP). The first occurred in 2006 when they filed restatements going back to 2002. These restatements were attributed to incorrect accounting for freight costs (Accounting Today, 2009). In 2008, they again announced that they would be filing restatements for Q1 2003 to Q3 2008 to correct certain customer refund and credit errors. These restatements resulted in a $12.9M reduction in revenue and a $10.3M increase to cumulative net loss (IT World, 2008).

According to then CEO Patrick Byrne, the incorrect accounting of customer refunds and credit errors was due to problems in implementing an upgrade to their Oracle enterprise...