Will E-Commerce Wilt Under the Accounting Spotlight?

Who knows, politically speaking, where the Enron mess will lead? But one thing seems certain: The way companies keep their books will get a very careful look.

Even with a business-friendly Republican administration in office, some form of more stringent government oversight is likely to take the place of the code of honor, secret-handshake-society system by which corporations, auditors and accounting firms now regulate themselves.

So, how well will e-commerce hold up under increased scrutiny?

Bad Omen?

Some argue that the current system works. Indeed, many companies discover and promptly reveal their own accounting mishaps, be they simple errors, exotic but technically legal techniques or plain old fraud.

But a cynic would argue that for every company that comes clean, there’s one trying to hide its cooked books under the desk for a little while longer. That concern led to a sharp stock market sell-off a couple of weeks ago.

Those who want to believe the worst have plenty of evidence to fuel their suspicions. In fact, e-commerce has its own example.

Heads Have Rolled

Online real estate firm Homestore.com took a longer than usual Christmas break as trading was halted in its stock for nearly two weeks. The reason, it turned out, was that Homestore had overstated revenue in the past, listing bartered advertising space as space sold for cash.

This was not just a minor embellishment, mind you; it was an overstatement of as much as 79 percent. Heads have rolled and lawsuits have followed, but considering all that has happened, Homestore actually has kept damage to a minimum.

One of a Kind

Maybe I’m just a cynic, but it seems to me that if Homestore recorded ads traded for other ads as actual sales and income, chances are very good that another dot-com out there did the same thing.

Remember, Homestore got away with it for quite a while. The period in question is three full quarters — a good nine months. The dollar value of the overstatement has been estimated to be as high as US$95 million.

It is easy to understand why this might have happened. The pressure to produce quarterly improvements and to be always moving toward, if not arriving at, profitability, has become suffocating of late. People under pressure do crazy things. Companies are, after all, just a bunch of people.

The other question raised by the Homestore story is how prevalent the practice of ad swapping seems to be. It is, in a way, a natural technique for the online world. If we’re non-competing Web sites but have overlapping audiences with similar interests, why wouldn’t I “buy” some space on your site in exchange for a banner or pop-up ad on my network?

Keeping It Real

My sense is that it’s not as bad as all that. Maybe someone at Homestore got greedy or lazy or a combination of both. Maybe a forensic auditor will turn up something else that helps explain away the situation. Maybe it is just an isolated case.

But as long as fear of more of the same is out there, it’s a problem for the online world. If investors can’t rest easy, that’s a problem, too.

Before long, a very bright public spotlight will shine on dot-coms’ books. Here’s hoping they can stand the heat.

What do you think? Let’s talk about it.