Groupon's Troubles Were Written on the Wall

By Michael Tarsala, Covestor

BOSTON (TheStreet) -- You didn't need an accounting degree to see Groupon's restatement mess coming.

Bloggers, journalists and professors had raised detailed concerns about its books ahead of its November initial public offering. But there was no stopping the surge of market orders on the company's first day of trading.

Fast forward to April. Groupon's market value has been been cut in half. It is now facing the extra scrutiny investors probably should have given the company in the first place. And the SEC may now be getting involved.

There's a group out there saying "I told you so." And, truly, they did.

Groupon is now a case study in why every investor needs to apply due diligence and skepticism when it comes to trendy stocks.

There are three main Groupon takeaways for every investor:

Read the details

This part is not that hard or time consuming: For your biggest individual investments, you should visit the SEC Edgar site and read the latest filings. In Groupon's case, that's where some of the first red flags surfaced.

In its IPO filing, Groupon acknowledged its management team has "limited experience" with regulatory compliance, a problem that seemed to persist for months. And the filings would have tipped you off to a previous revenue correction.

Also, blogs such as the daily linkfest at Abnormal Returns and Josh Brown's The Reformed Broker are now required reading. Brown, in particular, has been a consistent Groupon critic. Blogs helped to popularize questions from professors Ed Ketz and Tony Catanach about Groupon's accounting and internal controls. Those same professors were among the first to wonder out loud if Groupon was cooking its books.

If you don't understand it, avoid it

Warren Buffett is famous for this advice. And who am I to argue?

In Groupon's case, we're talking about a company that invented its own financial metric: Adjusted Consolidated Segment Operating Income. How's that for simplicity?

I can appreciate operating earnings (EBITDA, as an example) as a way to better understand earnings trends. Yet I had never heard of adjusted CSOI until Groupon came along, which was set up to exclude its marketing expenses. Keep in mind, marketing is essentially Groupon's business! Eric Savitz at Forbes brought the controversial metric to the fore 10 months ago.

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