I posted another comment on Deep Capture.

Sam E. Antar (former Crazy Eddie CFO and a convicted felon) says:
October 31, 2009 at 2:43 pm

Now that Patrick Byrne was kind enough to broach the subject of his email on this web site, I’d like to put it in context by summarizing the findings I have on my website concerning Overstock.com’s accounting:

In October 2008, Overstock.com disclosed new customer credit and refund accounting errors and restated all financial reports from Q1 2003 to Q2 2008 to reflect an additional $8.2 million of claimed accumulated losses in prior reporting periods. It was the second time in two years that Overstock.com restated its financial reports due a violation of GAAP. PricewaterhouseCoopers had erroneously given clean audit opinions on the company’s financial reports before each restatement correcting GAAP violations for such reports.

Those customer refund and credit errors also caused Overstock.com to underbill earned income due from its fulfillment partners for offsetting costs and reimbursements. Overstock.com restated its prior financial reports to correct its customer refund and credit errors. However, the company failed to make offsetting corrections and properly accrue underbilled income earned from its fulfillment partners in those same affected prior reporting periods, as required by GAAP.

Instead, Overstock.com improperly recognized income from its underbilled fulfillment partners using a non-GAAP cash basis as amounts were collected future accounting periods: Q4 2008 $1.8 million, Q1 2009 estimated at $1.4 million, and Q2 2009 $87k. For additional details see SFAS No. 154 and SFAS No. 5 paragraph 1, 2, 8, 22, and 23.

In effect, Overstock.com improperly created a “cookie jar reserve” to inflate earnings in future reporting periods. For example, the company should have reported a Q4 2008 loss, but instead reported a profit for that quarter by violating GAAP. That improperly reported net profit enabled Overstock.com to report its first quarterly profit after a string of 15 consecutive quarterly losses and beat mean analysts’ consensus expectations for earnings per share (See: SEC Staff Accounting Bulletin No. 99 about Materiality).