Audit related issues facing Groupon company - Assignment Example

? AUDIT RELATED ISSUES AUDIT RELATED ISSUES FACING GROUPON COMPANY Introduction Groupon Company is an online marketing firm that was first established in Chicago in the year 2008. It deals with day to day sale of coupons or discounted certificates to other firms as well as individuals. The common name for such kind of transaction is known as deal of the day transactions in which they make known discounts available in some restaurants. The interested customers then purchase the coupons electronically using their credit cards or paypal which they present in those restaurants. The firm has experienced tremendous growth since its inception with expansion in over five hundred markets in about forty seven countries worldwide. In the first year of its establishment, it managed to receive revenue worth $15 million which had never been witnessed by other players in the same industry (Garner, 2008). However, it has began to experience numerous challenges including a significant drop in the price of its shares in the New York Stock exchange market after its Initial Public Offer (IPO) in the year 2011 in the month of November. Stiff competition from its major competitors such Google and LivingSocial have further pushed down the pre-tax profits of Groupon. These firms quickly adopted the techniques used by Groupon and have since emerged stronger than it. Current problems experienced by Groupon can be traced to internal control failures according to the Chicago Tribune dated September 24th 2013. Internal control failures After registering low revenue than expected in its third quarter financial report, the management of the firm admitted to weak system of internal controls as the main cause of the decline in revenue. The admission was made to the United States Security and Exchange Commission (S.E.C) as they sought to explain their untimely report. The true picture of the firm was revealed after an external audit was conducted by Ernest & Young who revealed serious internal control failures over financial reporting. The company’s spokeswoman also blamed the poor internal controls for being the cause of lack of accuracy in the accounts. The company experienced a number of failures which led to a decrease in the earnings per share of its stock from 12 cents per share to 8 cents per share. As the company expanded, many internal control initially set up were not followed accordingly. Some specific internal control failures include inability to regulate the percentage discounts on each coupon as the demand for its services increased (Graham, 2011). The firm failed to monitor its sales as well as to keep track of its financial records. Some coupons could be sold at a loss leading to insufficient funds for the firms operations. Some firms terminated their contracts with Groupon as its shares began to decrease in value leading to a decline in its customer base. Before its Initial Public Offer, the firm introduced new protocols in its accounting procedures in a bid to paint an attractive picture to its prospective investors without checking the new system’s accuracy and reliability. In that case, there was no smooth transition between the old and the new accounting protocols and as a result some old systems were still in use. Specific solution There are several steps that the auditors of Groupon would have taken in order to avoid such failures in the internal control systems. First, there was a need to involve all stakeholders including its customers, shareholders and employees so as to seek their opinion before introducing any change in the internal controls. This would have assisted in improving and maintaining the trust of its employees and customers thus contributing in making them feel part of the firm. The main challenge with this approach is that it requires a lot of time to undertake as well as resources (Whittington, 2012). The second approach is to adopt the use external and more independent auditors after the internal auditors have done their part. This is however costly but a firm in the scale of Groupon is able to meet the cost. Thirdly there is a need to conduct a reshuffle of its employees on a timely basis as this would help minimize cases of familiarity in the work place and ensuring that they become more vigilant in their duties. The main challenge in this approach is the cost of retraining the employees as well as the longer duration that some of them will take to get fully acquitted with their new roles. Individual employee assessment and evaluation need to be conducted in order to ensure that each of them is conducting his/her duties effectively and has a distinct role in the organization. Restatement Another audit related issues commonly known as restatement also appeared in the report sent to the S.E.C according to the journal. It revealed restatement of revenue in which revenues were recorded before the completion of their generation process. This problem emanated from the fact that Groupon ignored the use of Generally Accepted Accounting Principles (G.A.A.P) but instead it adopted the use of Consolidated Segment Operating Income (G.S.O.I). The latter method requires that the firm’s investors not to focus on its huge expenses since they are of less significance to the firm’s revenue. A keen look indicated that Groupon had adopted a trend of overstating its cash flow statement before the IPO in order to make their shares more appealing to its potential investors. Recent changes in the firm’s refund policy caused the restatement. Initially it had a more relaxed refund policy without much scrutiny but this later changed due to the introduction of a significant increase in the price of its deals. The firm is found to be understating its operation costs especially those used in marketing its products just before its Initial Public Offer. A lot of resources were used to promote and to market Groupon through road shows and such costs were not accounted for properly but instead they were understated (Gleim, 1983). Specific solutions One of the recommendations that auditors need to give to the firm in its bid to tackle restatement is to aim at reducing its operating costs especially those used in marketing. The form can achieve this process by minimizing wasteful use of resources and being very specific with the goals to be achieved in any project and the expected returns. The projected returns must be higher than the cost to be used in attaining them. Costs can also be reduced by lowering the wages of employees or reducing the number of its employees. However this solution is coupled with numerous restrictions emanating from strict labour laws that are against wage reduction. Reducing the amount of incentives given to employees provides an indirect means of reducing the costs without having to directly reduce their wages. The firm should consider making some changes in its top management in a bid to bring in new ideas into the business. The changes in management need to be accompanied by changes in the organizational structure of the firm in its quest to ensure efficiency and productivity among its employees. On the other hand, the move may have negative impact in the organization due to the long duration needed to train the new employees especially those in the top management level. The restructuring may require a lot of research and analysis before it s properly undertaken which may result in extra costs being incurred. The firm need to reconsider its expansion plan since increasing the number of branches all over the world may lead to overcapitalization which is likely to impact negatively on the going concern initiative of the company (Porter, 2009). International operation is usually accompanied with high costs of operation as well as costs needed to meet the legal requirement in foreign countries. Some countries imposes high taxes on multinationals and therefore do not encourage foreign direct investments. The main challenge to this move is that it will lead to loss of employment opportunities leading to a rise in unemployment given that the current number of employees by Groupon is close to two thousand. Conclusion Due to the steady rise in the number of firms with internal control failures, the Public Company Accounting Oversight Board (PCAOB) has called for keen look into the auditing process and incorporation of new methods and guidelines. Firms such as Groupon are at the risk of being faced out of the market completely if they do not find rapid and quick solutions to their internal control problems as well as restatement issues. References Garner, D. E., McKee, D. L., & McKee, Y. A. A. (2008). Accounting and the global economy after Sarbanes-Oxley. Armonk, N.Y: M.E. Sharpe. Gleim, I. N., & Delaney, P. R. (1983). CPA examination review. New York: Wiley. Graham, L. (2011). Accountants' handbook: 2011 cumulative supplement. Hoboken, N.J: John Wiley & Sons Inc. Porter, G. A., & Norton, C. L. (2009). Financial accounting: The impact on decision makers. Mason, OH: South-Western Cengage Learning. Whittington, R., & Delaney, P. R. (2012). Wiley CPA exam review: Volume 2. Hoboken, N.J: J. Wiley. http://articles.chicagotribune.com/2013-09-24/business/ct-biz-0925-phil-20130925_1_groupon-shares-groupon-management-groupon-valuation Read More