Kellogg School of Management at Northwestern University
Groupon

When the JOBS Act was passed last month, it contained a provision that was largely overlooked. Companies are now allowed to submit confidential drafts of their IPO documents to the SEC. That sounds innocuous enough, but if you remember what happened with Groupon—as the Wall Street Journal does—it feels a bit less innocent.

The problem with Groupon was their accounting measures gave a distorted view of their actual performance. If Groupon had filed after the JOBS Act was passed, the questionable provision of the law would have kept those accounting measures secret until the IPO documents were filed publicly. There would have been no chance for the public to critique Groupon's documents. That concerns investors and accountants, including Anup Srivastava, an assistant professor of accounting.

“Approximately a year back, we raised concerns about Groupon’s accounting practices. We specifically pointed out problems with Groupon’s revenue and expense recognition policies,” Srivastava said.

“As expected, Groupon has since ‘restated’ its past financial performance, by reporting lower revenues and higher operating expenses. In common terms, when a firm restates its financial statements, it basically conveys, ‘oops, we made a mistake!’ and ‘sorry, you invested in our firms, based on wrong performance indicators!’ ”

Those actions have accountants questioning the wisdom of including the confidentiality provision in the JOBS Act. “Some may argue that Groupon’s example provides confirming evidence against the JOBS Act’s provisions,” Srivastava said. “While we agree with the directional effect, we do not yet have a large enough sample to conduct a systematic study to draw that conclusion.”

While there may not be ample evidence to condemn those provisions at this point, there is evidence for the directional effect to which Srivastava referred. IPOs are happening at younger and younger companies, according to a widely-cited 2004 paper by Eugene Fama and Kenneth French. Furthermore, Srivastava said his own recent research indicates that young companies are investing less in assets with high recovery values, meaning investors are left with little to liquidate if the company fails.

“In that context, the JOBS Act’s provisions, which permit a potential IPO firm a mechanism to avoid a public scrutiny of its accounting policies, seem inconsistent with above research,” he said. “For example, we have raised issues with Facebook’s accounting, since its accounting policies are publicly available. The JOBS Act provisions appear to contradict the spirit of Securities Act of 1933 and Sarbanes Oxley Act of 2002, that detailed disclosures result in greater transparency, greater investor protection, and more efficient allocation of capital.”

Photo by swanksalot.

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