Overstock's unaudited Q3 statement under fire

Overstock.com CEO Patrick Byrne on Tuesday defended his unorthodox decision to file an unaudited version of the company's third-quarter financial report with the SEC after parting ways with accounting firm Grant Thornton.

"I know this is a highly unusual step, but I'm all about doing the right thing, even if it's unusual," Byrne said.

The dispute between Overstock and its accounting firm centers on how the company, already under investigation for its past accounting, should have handled the financial reporting of an overpayment to a business partner.

"We refuse to knuckle under the SEC's and Grant Thornton's insistence that we abandon generally accepted accounting principles," Byrne said Tuesday, later softening the statement to include only Grant Thornton, saying the Securities and Exchange Commission has a right to look into the company's financials. "Hopefully in the next six weeks, we'll get this cleared up with the SEC."

He has scheduled a news conference for today to further discuss the matter. In the meantime, Overstock's move has been questioned in the blogosphere, where Henry Blodget of The Business Insider called the move "a red flag" and "bizarre." "Overstock has done something we can't recall seeing in 15-plus years of analyzing public companies," he wrote.

Several of those who track the company have said they were surprised that Overstock didn't simply delay filing the quarterly report. "What is amazing is that Overstock

went ahead and filed its 10-Q without an auditor reviewing it," wrote financial blogger Gary Weiss.

Byrne said he had no choice. "We couldn't delay past yesterday without falling into this total noncompliance category with the SEC." The company's third quarter ended Sept. 30.

The ramifications of filing an unaudited quarterly report are unclear, though audited financial statements and generally accepted accounting principles are the standard on Wall Street.

Neither the SEC nor Grant Thornton responded to requests for comment Tuesday.

The outspoken Byrne is perhaps best known for his high-profile campaign to convince federal regulators to more closely scrutinize the market practice of "naked short-selling." Lately, though, he's been absorbed with the SEC's investigation into the company's past years' financial reports.

A statement issued earlier this week by Byrne to investors and the media was unusual not only in its content but in its presentation, beginning with a quote by Friedrich Nietzsche: "All things are subject to interpretation; whichever interpretation prevails at a given time is a function of power and not truth."

Byrne said the problems with Grant Thornton started in February, when the company realized it had overpaid a business partner approximately $700,000. The money wasn't immediately returned to Overstock, however, because the unnamed company wanted to keep $400,000 of the $700,000 to settle an outstanding amount it said Overstock owed it, Byrne said.

How to account for the $700,000 became an issue for Overstock, he said.

"Weighing all the facts and circumstances at the time, we decided it would be a mistake to book this overpayment as an asset as of December 31, 2008, deciding instead to recognize the sums as we recovered the money, that is, we thought the conservative position was the correct position," Byrne said.

Byrne said the company's auditors at the time -- PricewaterhouseCoopers -- agreed. (Overstock this year changed auditors to Grant Thornton.)

In the first quarter of this year, Overstock said it received $785,000 to settle the overpayment. In early October and again in early November, the SEC sent Overstock letters asking the company to justify the way it accounted for the $785,000.

Byrne contended that Grant Thornton has said it came to believe that the company should have recorded the $785,000 as an asset in 2008. As a result, Grant Thornton said it would be unable to complete its review of Overstock's quarterly financial statements unless the company restated its 2008 financial results. The accounting firm also called into question the accuracy of the first and second quarter statements, said Byrne, who contended that Overstock appropriately accounted for the $785,000 and that the first and second quarterly statements were correct.

Overstock shares on Tuesday closed down 34 cents, or about 2 percent, to $15.91.

lesley@sltrib.com