Financials Restated: Overstock.com
In October 2008, Overstock.com announced that it would be restating their financial statements for the last five and a half years. Apparently when Overstock.com updated their system to an Oracle enterprise resource planning program in 2005, the wiring of the accounting system was done incorrectly. This occurred because their system of recording and tracking certain types of customer refunds. With the new system, some customer refunds required a manual entry. These manual entries for the refunds were not being credited to the accounts receivable, as they should have been, when the transaction took place. “Chidester also pointed out that these errors were partially masked by an offsetting error that made overall cost of returns appear reasonable. In the past two years, Overstock underbilled its fulfillment partners for some returns-related costs and fees, he said” (Taub, 2008)
The accounting principles involved with this restatement are the revenue and expense recognition principles. These principles state that companies need to recognize revenues and expenses in the periods in which they are earned. When Overstcok.com issued refunds without also adjusting the related revenue and accounts receivable accounts, the revenue recognition principle was not followed. Ultimately, net income or loss will be affected by these changes.
After the initial announcement in October 2008, Overstock.com determined that there were other errors. “Management subsequently determined, and the Board of Directors adopted management’s conclusion, that a portion of the error previously believed to be related to the accounting for customer refunds and credits was actually related to the accounting for gift cards issued to customers and that gift cards issued to customers were not completely and accurately recorded in the consolidated financial statements.” (Overstock.com, Inc., 2008) The cumulative effect of the changes are to increase net...