Overstock.com, Inc.

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Overstock.com, Inc.

In March 2000, the Securities and Exchange Commission (SEC) began requiring public companies to have their quarterly financial statements “reviewed” by their independent auditors. The broad purpose of this new requirement was to improve the quality and credibility of quarterly financial reporting. A more specific goal was to reduce the frequency of accounting restatements by SEC registrants. In addition, the SEC hoped the new rule would serve to counteract the “increasing pressure” being imposed on public companies to “manage” their interim financial results.

On November 16, 2009, Overstock.com shocked its stockholders, regulatory authorities, and Wall Street by filing an “unreviewed” Form 10-Q with the SEC. In a press release issued that same day, Patrick Byrne, Overstock’s mercurial chief executive officer (CEO), reported that the decision to file the unreviewed 10-Q had been necessary because of an unresolved dispute with Grant Thornton LLP, the company’s audit firm. That dispute centered on the proper accounting treatment to apply to an unusual transaction involving one of Overstock’s business partners. Byrne also revealed that the company had dismissed Grant Thornton as a result of that dispute–later that day, Overstock filed a Form 8-K with the SEC reporting the audit firm’s dismissal.

Overstock’s surprising decision to file an unreviewed 10-Q with the SEC caused the investment community to wonder what would happen next. How would the SEC react to Overstock’s decision to seemingly thumb its nose at the federal securities laws? Would the NASDAQ stock exchange suspend the trading of Overstock’s common stock? When or would Overstock be successful in retaining another accounting firm to serve as its independent auditor?

Buffett, Byrne & The Bubble

Before entering the business world, Patrick Byrne, the son of a wealthy associate of Warren Buffett, lived the life of a bon vivant and Renaissance man. After spending time as a student in China, Byrne earned an undergraduate degree from Dartmouth, a Master’s degree from Cambridge, and a doctorate in philosophy from Stanford. In addition to accumulating an impressive educational portfolio, Bryne traveled the world, earned a black belt in martial arts, made a brief foray into professional boxing, and served as a university instructor.

Warren Buffet launched Patrick Byrne’s career in the field of corporate management in 1998 when he asked him to serve as the interim CEO of a financially troubled subsidiary of Berkshire Hathaway, Buffett’s flagship company. Eighteen months later, Byrne struck out on his own when he acquired a controlling interest in a small online company based in Salt Lake City that marketed “excess” and “closeout” merchandise over the Internet. Byrne was convinced that with the proper business plan, capitalization, and management team in place, the company’s core concept could be wildly profitable. Over the following few months, Byrne appointed himself CEO, invested several million dollars to expand the company’s operations, and renamed it Overstock.com.

In 2000 and 2001, the spectacular bursting of the “dot.com bubble” decimated hundreds of New Age Internet-based companies that had sprung up like wild mush-rooms over the prior decade. The resulting carnage caused the NASDAQ Composite Index that is laced with e-commerce companies to decline by approximately 80 percent in less than three years.

While most online companies were either being forced to shut down or significantly curtail their operations, Patrick Byrne recognized that the dot.com debacle created an opportunity for his company. Overstock began liquidating the unsold merchandise of failing online businesses at fire sale prices. In 2002, the company’s growing revenues and apparently strong business model caused Business Week to name Byrne one of the 25 most influential corporate executives in the rapidly evolving e-commerce sector of the national economy. That same year, Patrick Byrne took Overstock public, the first online retailer to do so in almost two years. The company raised $40 million with its initial public offering (IPO) and listed its common stock on the NASDAQ stock exchange.

Gradually, two distinct lines of business emerged within Overstock’s exclusively online operations. Overstock’s “Direct” line of business sold merchandise that it had acquired from other sources to individuals and companies. In Overstock’s much larger “Partner” line of business, the company served as an intermediary or sales agent for more than 3,000 “business partners.”  Overstock earned a commission on the merchandise sales that it arranged or facilitated for those partners. For accounting and financial reporting purposes, Overstock recorded most sales of partners’ merchandise as gross revenue and then subtracted the cash remittances made to those partners as cost of goods sold; the differences between those amounts represented the commissions earned by Overstock on the sales transactions.

Overstocked on Problems

By 2009, Overstock’s annual revenues were approaching $1 billion; one decade earlier when Patrick Byrne acquired the company, it had annual revenues of a few hundred thousand dollars. Despite the company’s impressive revenue growth, the company struggled to become profitable. When the controversy arose regarding Overstock’s unreviewed 10-Q in November 2009, the company had yet to report a profit for a full fiscal year. Making matters worse, the company’s stock had been pummeled in the market over the previous several years, falling from a high of $76 per share in December 2004 to less than $15 per share by November 2009.

Several factors in addition to Overstock’s recurring operating losses caused investors to shy away from the company’s common stock. Patrick Byrne, himself, attracted a storm of negative attention to the company by the relentless attacks that he unleashed on major Wall Street firms and regulatory authorities. Byrne claimed that several hedge funds and other large institutional investors were driving down the price of Overstock’s common stock and attempting to destroy the company. Those parties’ efforts allegedly involved “naked short selling” of Overstock’s common stock, a tactic that in most circumstances is illegal.

Byrne insisted that regulatory authorities responsible for policing the nation’s stock markets, including the SEC, were involved in the conspiracy to destroy Overstock and other companies targeted by the alleged cartel of naked short sellers. According to Byrne, those regulatory authorities refused to prosecute or otherwise rein in the naked short sellers. Byrne’s fierce and highly public crusade caused Overstock to take the unprecedented step of listing its CEO as a “risk factor” faced by the company; public companies are required to identify in their periodic SEC filings the major risk factors that could undermine them. Overstock reported in multiple SEC registration statements that controversial public statements made by Byrne, particularly those directed at the SEC, might focus unwarranted regulatory attention on the company.

Even more disconcerting to potential investors than Byrne’s bombastic persona were the company’s recurring accounting problems. During its first several years as a public company, Overstock restated prior financial statements multiple times. Audit Integrity, a forensic consulting firm, reports “accounting and governance risk” (AGR) measures for public companies that are intended to be predictive of financial statement fraud. Overstock’s repeated restatements caused Audit Integrity to assign Overstock an “aggressive” AGR rating.  The November 2009 disclosure of Overstock’s dispute with Grant Thornton raised the possibility that the company might be forced to restate its prior financial statements once more.

Overstock was also criticized for using pro forma accounting measures—earnings before interest, taxes, depreciation, and amortization (EBITDA) in particular—to draw investors’ attention away from, and downplay the significance of, its recurring operating losses. Sam E. Antar, a self-appointed crusader against financial reporting fraud and the author of a blog entitled “White Collar Fraud,” charged that Overstock improperly and opportunistically computed the EBITDA amounts that it reported to investors.

“Cookie Jar” Accounting

The dispute that culminated in Overstock’s audit committee firing Grant Thornton was triggered by an error made by the company’s accounting staff in 2008—company officials readily admitted that the error resulted from a deficiency in Overstock’s internal controls. The accounting error caused Overstock to remit a $785,000 overpayment to one of its business partners which overstated Overstock’s cost of goods sold for 2008 by the same amount. Because of uncertainty regarding whether the $785,000 would be recovered, Overstock’s accounting staff characterized the overpayment as a “gain contingency” and chose not to record a correcting entry for it.

Overstock recovered the overpayment from its business partner during the first quarter of 2009. The company’s accountants recorded the offsetting credit for the $785,000 cash receipt as a reduction in costs of goods sold for that period. To assess the impact of the $785,000 amount on Overstock’s 2008 and first-quarter 2009 financial statements, refer to Exhibit 1which presents selected financial data initially reported by Overstock in its 2008 Form 10-K and its 10-Q for the first quarter of 2009.

Exhibit 1Overstock.com, Inc. Selected Financial Data


Overstock’s frequent and harsh critic, Sam E. Antar, suggested that the $785,000 accounting error was actually an intentional ploy to create a “cookie jar” reserve to overstate Overstock’s 2009 operating results.  Floyd Norris, a prominent business journalist for the New York Times, offered a similar explanation for the accounting treatment that Overstock applied to the $785,000 overpayment. Again, at this point in time, Overstock had yet to report a profit for a full fiscal year, but company officials were hoping 2009 would prove to be the company’s breakthrough year.

PricewaterhouseCoopers (PwC), which had served as Overstock’s audit firm since prior to the company’s IPO in 2002, agreed with the accounting treatment applied by the company to the $785,000 overpayment and issued an unqualified opinion on Overstock’s 2008 financial statements. Following the completion of the 2008 audit, Byrne reported that Overstock had decided to retain a new audit firm because of concern that company management and the PwC audit staff were becoming too “cozy” after having worked together for the previous several years. In March 2009, Overstock’s audit committee selected Grant Thornton as the company’s new audit firm.

He Said, They Said

On October 1, 2009, Overstock received a letter of inquiry from the SEC regarding several accounting decisions that the company had made, including the accounting treatment applied to the $785,000 overpayment. Overstock’s accounting staff consulted with both the Grant Thornton auditors assigned to the 2009 Overstock engagement team and with the company’s former PwC auditors before responding to the SEC inquiry. According to a subsequent Form 8-K filed by Overstock with the SEC, Grant Thornton and PwC reportedly agreed the accounting treatment that had been applied to the overpayment was reasonable.

On November 3, 2009, Overstock received a second letter of inquiry from the SEC. This inquiry asked for additional information regarding the accounting treatment for the $785,000 overpayment. Again, Overstock’s accounting staff consulted with both Grant Thornton and PwC in preparing the company’s response to the SEC inquiry. At this point, a Grant Thornton representative reportedly informed Overstock that the accounting firm had “revised its earlier position of agreement with the Company’s accounting treatment”  for the overpayment. Grant Thornton then recommended that the company restate its 2008 financial statements and record the $785,000 amount as both a receivable and a reduction in the company’s cost of goods sold in those financial statements. The firm also recommended that the company restate its 10-Q for the first quarter of 2009 to eliminate the $785,000 reduction in cost of goods sold that was recorded when the 2008 overpayment was recovered.

Overstock and PwC disagreed with Grant Thornton’s recommendation to restate the company’s prior financial statements for the overpayment error as Patrick Byrne explained in a press release included as an exhibit to an 8-K filed with the SEC on November 17, 2009. “We, along with PwC, continue to believe that we accounted for the $785,000 correctly…. Both we and PwC believe that it is not proper to reopen our 2008 Form 10-K.”  Byrne went on to explain the “quandary” that the dispute with Grant Thornton posed for his company. “Thus, we are in a quandary: one auditing firm won’t sign off on our Q3 Form 10-Q unless we restate our 2008 Form 10-K, while our previous auditing firm believes that it is not proper to restate our 2008 Form 10-K.”

Byrne reported that the dispute with Grant Thornton had resulted in Overstock deciding to “engage another independent audit firm.”  In the meantime, the company had decided to file an unreviewed 10-Q for the third quarter of 2009 with the SEC. Exhibit 2 presents an “Explanatory Note” that Overstock included as a prologue to that 10-Q. The note identified the potential “consequences” that Overstock might face as a result of filing a “deficient” 10-Q with the SEC. Those potential consequences included the inability to sell registered securities because of a failure to comply with federal securities laws and the delisting of the company’s common stock by the NASDAQ stock exchange.

Exhibit 2

“Explanatory Note” Included with Overstock’s Initial Form 10-Q for the Third Quarter of 2009

On November 13, 2009, Overstock.com, Inc. (“The Company”), dismissed Grant Thornton LLP (“Grant Thornton”) as the Company’s independent registered public accounting firm. At the time of the dismissal, the Company and Grant Thornton had a disagreement on a matter of an accounting principle or practice. See Note 15 – “Subsequent Events.” The Company has not yet engaged a successor accounting firm.

As a result of Grant Thornton LLP’s dismissal, the accompanying 2009 unaudited interim financial statements and notes thereto for the quarterly period ended September 30, 2009, have not been reviewed in accordance with Statement of Auditing Standards No. 100 (“SAS 100”), as required by Rule 10-01(d) of Regulation S-X promulgated under the Securities Exchange Act of 1934. The Company intends to file an amendment to this Form 10-Q to file unaudited interim financial statements for the quarterly period ended September 30, 2009, reviewed in accordance with SAS 100 as required by Rule 10-01(d) as promptly as practicable after it has resolved outstanding matters addressed in a comment letter it has received from the Division of Corporation Finance of the Securities and Exchange Commission (“SEC”) and has engaged a successor independent registered public accounting firm.

Because the financial statements contained in this Form 10-Q do not meet the requirements of Rule 10-01(d) of Regulation S-X, the Company may not be considered current in our filings under the Securities Exchange Act of 1934. Filing an amendment to this report, when the independent registered public accountants’ review is complete, would eliminate certain consequences of a deficient filing, but the Company may become ineligible to use Form S-3 to register securities until all required reports under the Securities Exchange Act of 1934 have been timely filed for the 12 months prior to the filing of the registration statement for those securities. The Company is evaluating the impact of filing a deficient Form 10-Q due to lack of a review by an independent registered public accounting firm on its covenants under its contractual commitments, its obligations under the NASDAQ Stock Market listing standards, and the Securities Exchange Act.

Source: Overstock.com, Inc., initial Form 10-Q for the third quarter of 2009.

During Overstock’s November 18, 2009, quarterly earnings conference call, Byrne justified his decision to file the unreviewed 10-Q with the SEC.  He maintained that providing investors with an unreviewed 10-Q was better than providing them nothing at all. He then went on to explain that Overstock would file an amended 10-Q after retaining a new audit firm and resolving the issues raised by the SEC letters of inquiry.

As required by the SEC, Overstock asked Grant Thornton to prepare an exhibit letter to be filed as an attachment to the 8-K announcing the company’s decision to dismiss the accounting firm as its independent auditor. In that exhibit letter, Grant Thornton was required to indicate whether or not it agreed with Overstock’s discussion of the circumstances and events that had preceded the decision to change auditors.

In Grant Thornton’s exhibit letter dated November 20, 2009, the firm stated that it had never agreed with the accounting treatment applied by Overstock to the $785,000 overpayment. According to the accounting firm, it had become aware of the overpayment for the first time in October 2009 when Overstock brought that item to its attention. Grant Thornton also indicated repeatedly in the exhibit letter that it disagreed with Overstock’s description of other circumstances and events preceding the company’s decision to change auditors.

Grant Thornton’s statements in the exhibit letter prompted a caustic reply by Patrick Byrne. In a press release included as an exhibit to an 8-K filed by Overstock with the SEC on November 25, 2009, Byrne contested Grant Thornton’s assertion that it had never acquiesced to the accounting treatment initially applied to the $785,000 overpayment by characterizing that assertion as a “falsehood.” Byrne reported that Grant Thornton had reviewed Overstock’s 10-Q for the first quarter of 2009 and informed “the audit committee before we filed those financial statements that it had no changes to those financial statements.”

Byrne went on to flatly contest most of the other assertions made by Grant Thornton in the exhibit letter filed with Overstock’s earlier 8-K. Near the end of the lengthy press release, Byrne summarized his views regarding his company’s spat with its former audit firm. “We are surprised by these inconsistencies and inaccurate statements in Grant Thornton’s November 20 letter to the SEC. I take them as proof (as though further proof was needed) that our audit committee made the correct decision to dismiss Grant Thornton.”

The SEC did not publicly comment on the deficient 10-Q filed by Overstock for the third quarter of fiscal 2009. On November 19, 2009, three days after filing that 10-Q, Overstock was notified by the NASDAQ that it had violated the organization’s “listing rules.” The NASDAQ informed Overstock it had 60 days to submit a plan to reestablish its compliance with those rules. If that plan was approved, Overstock would have an additional four months to implement the plan.


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 Overstock’s prior financial statements included overpayments made to certain of the company’s 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.”

Overstock’s 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 NASDAQ’s listing rules. In April 2012, the SEC notified Overstock that its investigation of the company’s 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 company’s 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 company’s financial statements. Patrick Byrne remains the company’s CEO at last report.


  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 public’s 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 doesn’t 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?

Last Updated on February 12, 2019 by EssayPro