Overstock.com Restates Earnings, Cites ERP Implementation

Internet retailer Overstock.com is restating its earnings for a five-and-a-half-year period, blaming the move mostly on problems with an Oracle ERP (enterprise resource planning) implementation project that dates back several years.

"Our 1st Commandment is 'maintain a bullet-proof balance sheet,' but while the spirit is strong, the flesh made a mistake," Overstock.com CEO Patrick Byrne said in an Oct. 24 letter to shareholders. "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."

Overstock estimates that errors over the period in question -- 2003 through the second quarter of 2008 -- constitute a US$12.9 million reduction in revenue and a $10.3 million increase to cumulative net loss.

Neither Byrne's nor a separate statement from Overstock's senior vice president of finance, David Chidester, explicitly blames Oracle or any systems integrator for the system's problems.

Chidester's statement provides a more specific account of what allegedly went wrong.

"As part of this accounting system upgrade we changed from recording refunds to customers in batches to recording them transaction-by-transaction," Chidester said. "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."

Overstock uses internal "reason codes" that show why various customers get refunds, Chidester added.

"Under the new system, not all reason codes were automatically recorded; some customer refunds required manual entry in the financial system. We set up automatic and manual processes so that these would be recorded," he said. "Unfortunately, we missed some of the manual customer refunds, and as a result, we did not record all that were occurring. Over time, this error built up and, on a cumulative basis, eventually became material."

In addition, the company learned that the system failed to "reverse out" shipping revenue for cancelled orders, "and these $2.95 charges also added up over time."

Meanwhile, however, Overstock had been underbilling its fulfillment partners for certain costs related to product returns over the past two years, Chidester said. "In other words, we weren't recording some customer refunds and we weren't recouping some costs from partners on some returns. The combined result was that our returns costs looked reasonable."

The company has since "reexamined [its] procedures for testing and verification of the balance sheet" and "put into place processes to record all refunds in our financial system," Chidester added.

Overstock.com and Oracle did not immediately respond to requests for comment Monday.

One observer said problems like those cited by Overstock.com can happen on any ERP project without the proper care and planning.

"The ERP system will do what you design it to do, which is why we often say it's very important to spend time on design and mapping," Forrester Research analyst Ray Wang said via e-mail Monday. "Of course, it's even more challenging if this is the first ERP system put in at a company. In that case, you are challenged with capturing all manual processes."

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