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Internet retailer says it will need to restate earnings for a five-and-a-half year period as a result of its own mishandling of an Oracle enterprise resource planning system implementation.
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Internet retailer Overstock.com says it will need to restate earnings for a five-and-a-half year period as a result of problems arising from an Oracle enterprise resource planning system implementation.
But while the restatement is tied to the enterprise resource planning (ERP) implementation, Overstock is not blaming Oracle for the damage. It says accounting errors arising from the implementation are a result of its own mishandling of the implementation.
"Our 1st Commandment is 'Maintain a bullet proof balance sheet'," Overstock Chief Executive Patrick Byrne said in a letter to shareholders. "But while the spirit is strong, the flesh made a mistake.
"The short version is: when we upgraded our system, we didn't hook up some of the accounting wiring; however, we thought we had manual fixes in place. We've since found that these manual fixes missed a few of the unhooked wires."
The impact: Overstock says it will need to reduce revenues over a five-and-a-half year period, beginning in 2003 through to the second quarter of 2008 by $12.9 million (a period in which the company generated $3.5 billion in revenue.) This will lead to a $10.3 increase to the Salt Lake City-based company's cumulative net loss.
Overstock becomes the latest in a string of companies to blame problems with ERP implementations for financial troubles this year. In July, jeans manufacturer Levi Strauss reported that its second quarter results plummeted 98% from the previous year, due in part to problems encountered with an implementation of SAP software. See CIOZone article: ERP Woes Hurt Levi Strauss. Earlier this year, American LaFrance, a 175-year-old manufacturer of fire trucks and other emergency vehicles, went into bankruptcy proceedings after it said it encountering severe problems with its ERP installation. See CIOZone articles (Part I and Part II). And in March of this year, Waste Management revealed it was suing SAP after it says it spent more than $100 million on an implementation that turned out to be a "complete failure." See CIOZone article: Waste Management Sues SAP.
Overstock was founded by Byrne in 1999 as an Internet-based retailer of overstocked or liquidation items. It has grown from $1.8 million in revenue in 1999 to $760.2 million in 2007.
To support its rapid growth the company decided to upgrade from a home-grown accounting system to the Oracle-based ERP system in 2005. In a letter to shareholders, Overstock Vice President of Finance David Chidester says the company believes it has identified and fixed the problems which caused the financial reporting errors and that he was confident the system would be reliable going forward.
He offered the following explanation for the errors: "As part of the (Oracle) accounting system upgrade we changed from recording refunds to customers in batches to recording them transaction-by-transaction. When we issue a customer refund, the refund reduces the amount of cash we receive from our credit card processors and, as a result, our financial system should reduce our accounts receivable balance. After the implementation, in the instance of some customer refunds, this reduction wasn't happening and we didn't catch it."
Chidester went on to say that Overstock uses internal codes to track the reasons it gives customer refunds and that under the new system, not all "reason codes" were automatically recorded. Some refunds required manual entry and in the implementation that manual process was not properly plugged into the financial reporting system. "Over time, the error built up and, on a cumulative basis, eventually became material," Chidester said.
In a separate instance, the company discovered that the system was not reversing shipping revenue for cancelled orders and the $2.95 charges also added up over time.
Chidester said he is confident the errors have been fixed and that additional controls and checks have been put in place to ensure the accuracy of the financial reporting system.
While the ERP difficulties cast a dark cloud over the company's earnings, Byrne says Overstock is "holding our own" in the downturn. Revenues grew 17% in the quarter to $187 million compared to $160 million in the same period a year ago, while the net loss was $1.6 million compared to $5.6 million a year earlier.
"This holiday season and the quarters ahead will be challenging for the retail industry," he added. "I believe that in general we are counter-cyclical because in tough times consumers become deal-hunters: it remains to be seen if that dynamic can offset the macro dynamics settling over the whole economy."
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