Groupon Inc - Research Paper Example

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is all about its internal controls. This is a weakness that the company has not addressed sufficiently in particular with regards to its often generous refund policy.1 This weakness had been identified by the companys external…
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GROUPON, INCORPORATED (Material Weaknesses, Internal Controls, and Audit Exceptions) ID Number: of Professor’s Name:
Name of School (University)
Date of Submission: April 29, 2015
The article by Wailin Wong about Groupon, Inc. is all about its internal controls. This is a weakness that the company has not addressed sufficiently in particular with regards to its often generous refund policy.1 This weakness had been identified by the companys external auditors, the global accounting firm of Ernst & Young, as “a material weakness” because their accounting procedures cannot provide “reasonable assurance” as to the accuracy of these accounts as well as an insufficiency of said procedures to provide “an accurate and timely” reporting of its results. It has resulted into numerous restatements of financial statements. Any material weakness means internal controls were ineffective and not able to detect misstatements or irregularities.
This weakness was cited by the accounting firm as the cause of its revised earnings and revenues. An audit exception like that cited by Ernst & Young regarding the refund policy of the Groupon company is the cause of the inaccuracies in its financial statements. It is considered as a “material weakness” because the weakness is big enough or serious enough to impact the overall accuracy of the audited financial statements prepared by Ernst & Young. This particular ruling is contained under Auditing Standard No. 5 which states the requirements to be met by a firm to assess its managements effectiveness in instituting internal controls with regards to the financial reporting integrated with an audit of its financial statements.2 The crucial issue therefore causing the material weakness is the inability of Groupon to accurately predict the approximate amount of refunds it will give to customers who did not avail of promos based on varying coupon prices. It is a serious issue that impacts earning per share resulting in the stock price sliding 7% in a day.
A monetary unit sampling (MUS) is a very useful method used by auditors to determine if a particular financial account is fairly stated.3 In the case of Groupon, the auditors must have a feeling its refund account is not stated accurately enough. The executives at Groupon admitted its difficulty with regards to estimating accurately the amount of refunds it will have to pay out due to the refund behavior of customers which started to shift or change around the year 2011 as a result of the company introducing higher-priced deals. This change in its mix of product deals means a requirement for increases in its reserve fund to deal with the higher-priced deals being unavailed and returned by some customers because these deals were more expensive.
The problem discovered by the auditors is the business model used by Groupon to help it estimate the amount of probable refunds is based on the older, lower-priced deals. In other words, this approach resulted in a significant deficiency in the reserve fund to deal with larger refunds resulting from higher-priced deals not availed by customers. The old business model that was used to compute or estimate for probable refunds was a mismatch because of the high-priced deals which customers may have thought as not worth it at all so they returned the coupons.
The material weaknesses made by Groupon centered on its refund policy as the auditors discovered using the MUS auditing technique. The MUS is otherwise known as the dollar-unit sampling method. In this particular case, the auditors choose at random any of return vouchers as samples for their examination. Based on the vouchers selected at random, there is now a greater chance of a higher-priced voucher being selected from the sample population than lower-priced vouchers. There is now a preponderance of higher-priced vouchers selected by the auditors.
Moeller, Robert R. Brinks Modern Internal Auditing: A Common Body of Knowledge. Hoboken, NJ, USA: John Wiley & Sons, 2009.
Public Company Accounting Oversight Board. “An Audit of Internal Control over Financial Reporting that is Integrated with an Audit of Financial Statements.” PCAOB, 2015.
Wong, Wailin. “Groupon Reveals Lower Revenue, Admits Internal Controls Weakness.” Chicago Tribune, March 30, 2012. Read More
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