Groupon Inc.'s latest restatement, following accounting misstepslast year, heightens concern about the reliability of the company'sfinancial reporting and raises questions whether auditors gaveenough oversight to the coupon provider's novel business model.

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The Chicago-based company reported a “material weakness” infinancial controls on March 30 and said fourth-quarter sales werelower than previously stated because of higher refunds tomerchants. That cut revenue in the period — Groupon's first as apublic company — by $14.3 million to $492.2 million.

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The announcement added to setbacks for Groupon, which hasstruggled to get its financial statements in order since filing foran initial public offering in June. The company abandoned anaccounting method for operating income after a review by regulatorsand later restated 2010 results. The moves raise questions aboutwhy Groupon's auditor, Ernst & Young LLP, didn't point outconcerns sooner, said Herman Leung, an analyst at SusquehannaFinancial Group in San Francisco.

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“This should have been highlighted by the auditors,” said Leung,who has a neutral rating on shares of Groupon and doesn't own thestock. “The business is growing so fast that it sounds like theydon't have the proper financial controls to deal with thegrowth.”

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Groupon shares fell 5.9 percent to $17.29 in extended trading onMarch 30 after the announcement. The stock, down 8.1 percent sincethe IPO in November, had climbed 3.8 percent earlier in theday.

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The shares fell as much as 12 percent and were 6.8 percent lowerto the equivalent of $17.51 at 9:46 a.m. in Frankfurt.

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Groupon said it has been working for several months with aglobal accounting firm other than Ernst & Young to address thecauses of the material weakness. Groupon, which didn't identify theother firm, said it plans to report on the effectiveness of itsinternal controls by the end of this year.

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Charlie Perkins, a spokesman for New York-based Ernst &Young, declined to comment on the earnings restatement.

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Groupon said it's taking several steps to address the controlsover reporting. These include hiring more finance personnel andexpanding the scope of the accounting firm.

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“Although we plan to complete this remediation process asquickly as possible, we cannot at this time estimate how long itwill take, and our initiatives may not prove to be successful inremediating this material weakness,” Groupon said in the regulatoryfiling.

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'Extremely Unusual'

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Restatements and disclosures of material weaknesses are rarethis soon after an IPO because the Securities & ExchangeCommission requires detailed checks on financial controls before adebut, said Lise Buyer, principal at Class V Group.

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“It's extremely unusual, as companies generally go through verythorough audits before filing and so should have their policies andprocedures fairly well ironed out,” said Buyer, whose firm is basedin Portola Valley, California. Buyer advises startups on publicofferings.

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Groupon said it failed to account for an increase inhigher-priced deals, which are more likely to be refunded bycustomers. The company started selling discounts on plane ticketsin partnership with Expedia Inc. last year and began offeringGroupon Reserve, a service for upscale deals such as a five-coursemeal at Santa Monica, California-based restaurant Whist for$99.

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Groupon said the latest changes “are primarily related to anincrease to the company's refund reserve accrual,” leading tohigher reimbursement rates.

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The company says it will refund the purchase price of coupons,known as Groupons, in cases where a customer isn't satisfied.Still, Groupon has a limited period during which it can seekreimbursement from a merchant for a refund, and its customers maytry to get refunds in cases where the company can't get reimbursedfrom partners.

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“Our inability to seek reimbursement from our merchant partnersfor refund claims could have an adverse effect on our liquidity andprofitability,” Groupon said in its filing.

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The higher refunds boosted operating expenses that in turnwidened Groupon's net loss by $22.6 million, or 4 cents a share.The company held to a forecast for first-quarter sales of $510million to $550 million and income from operations of $15 millionto $35 million.

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Accountants may have had difficulty tracking changes in refundsbecause Groupon's business model is relatively new, said TomTaulli, an IPO consultant in Newport Beach, California.

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Groupon pioneered the market for daily deals, which offerdiscounts on restaurant meals, nail-salon packages and otherservices. Groupon splits the revenue from the offers withmerchants.

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“There is very little history on return rates,” Taulli said.“Groupon hasn't been around for a long time and has been expandingso quickly, it's got to be a nightmare for an auditing firm.”

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Groupon also stumbled ahead of its IPO when Chairman EricLefkofsky said the company is “going to be wildly profitable” in aninterview with Bloomberg News. In July, the company updated its IPOfiling, asking investors to disregard those comments because theydidn't accurately or completely reflect his views.

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Bloomberg News

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