Why This B-School Prof Says Groupon Is Cooking Its Books

Last Updated Sep 16, 2011 3:39 PM EDT

We don't really know why Groupon (GRPN) is delaying its IPO or why the SEC contacted the company. But here's one possibility: Groupon's balance sheet is as weird as the rest of its business (Exhibit A: CEO Andrew Mason's naked yoga video, pictured).

At the beginning of the year, $42.4 million in uncollected revenues sat on Groupon's books, up from just $601,000 the year before. As a percentage of all sales, Groupon's unpaid "accounts receivable" tripled as portion of its revenues from 2 percent in 2009 to 6.7 percent by the end of 2010:

  • 2009
    Revenues: $30.5 million
    Gross Profit: $10.9 million
    Accounts receivable: $601,000
  • 2010 Revenues: $713.4 million
    Gross Profit: $280 million
    Accounts receivable: $42.4 million
  • H2 2011 Revenues: $1.5 billion
    Gross profit: $611 million
    Accounts receivable: $99.7 million
"Earnings manipulation"?
A proportional tripling of uncollected debts is one of the signs of a company that is cooking its books, according to Prof. Anthony Catanach of the Villanova School of Business.

Using the Beneish Model (an eight-variable statistical model that calculates the probability of a company manipulating its earnings, as I'm sure you knew) Catanach says "Groupon has a 100% probability of earnings manipulation based on 2009 and 2010 financial data."

One of the variables is the "Days Receivable Index," which suggests aggressive revenue recognition. That index calculates accounts receivable as a percentage of revenues and then looks at whether that percentage is increasing or decreasing. It's increasing at Groupon, or at least it was until Jan. 1, when the company stopped publishing information about it.

If you calculate the same ratio as a portion of Groupon's gross profits, which is the money Groupon keeps after it has paid off the merchants who supply its offers, then the numbers come out rather more charitably for the daily deal emailer: Receivables were 5 percent of gross profit in 2009, 15 percent in 2010, and 16.3 percent through the first half of 2011.

That doesn't look like too dramatic ... until you consider what it means to Groupon. The company fails to collect nearly 17 percent of its revenues* in a timely fashion, and is getting worse at doing so as time goes by, even though almost all its users are paying by credit card. No wonder it is so dependent on temporary (and, in the long-term, unsustainable) cashflow gimmicks.

*Correction: This item originally said, incorrectly, that Groupon's accounts receivable were nearly 40 percent of gross profit and that the company had not published a full balance sheet in 2011. Apologies for the errors.