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					                                Fortune Magazine
                                 March 20, 2000
                                     Page 90

                    Presto Chango! Sales are Huge!
The dot-coms have been quick to learn accounting sleight of hand. Their best
                   trick: pulling revenues out of thin air

                                By Jeremy Kahn

The SEC is clearly concerned with the accounting shenanigans at many dot-
coms. The rules governing bookkeeping at public companies leave plenty of
room for those inclined to dupe unsuspecting investors

Despite that revenue is the common yardstick for measuring a company’s
worth, earnings alone are not a fair measure its value.

For a website trading at 200 times expected sales and recently Vertical Net,
for example, was sellingat 793 times sales and InfoSpace ar 401 times sales
– even a tiny increase in reported revenues can translate into a huge increase
in market capitalisation. This obviously has associated benefits for those with
stock options.

Most of the practices that many of these dot-com companies use (and some
of them are very well known companies) are legal for now, but the question is
whether or not they are ethical.

Net vs Gross

This practice involves stating that the entire amount collected at the till is
“revenue” whereas it is only the gross amount collected. The company does
not keep all of it and, in fact, may sometimes only keep a small percentage of
the Gross. Travel agents call this “Gross Bookings” not “Revenue”. Out of
$134m, only kept $18m which it called “Gross Profit” and other
companies call “Revenues”.


Exchange of advertising space on web pages for advertising on television or
radio is a common method of overstating revenue. That is, web advertising
space that usually sells for $1m but is taken up by a company in exchange for
TV ads is still being counted by these dot-coms as $1m revenue when, in fact,
it is not a real cash sale.

Coupons, Leaders and Loss Leaders

There is a proliferation of free offers and give-aways on the internet to attract
customers. There is nothing essentially wrong with that other than the way
that it is recorded in the books. For example: a $50 jumper is sold to a
customer who uses a $10 voucher. The actual sale is only $40 but is recorded
as the full $50 with the $10 being recorded as a marketing expense. Hence
the inflated revenue figure.
AOL claimed that its huge marketing expense in distributing free CDs to every
mailbox on earth was a legitimate investment in their consumers since
members signed up for an average of two years. They reported the cost over
two years and made them look more profitable because they spread their
$350 expense over 24 months.

Internet Service Providers continue to play accounting games with their
marketing expenses. For instance some ISPs offered a $400 discount on
Computers to consumers who bought 3 years of Internet Service. The sale
was recorded at the full price and they booked the $400 as marketing

Many executives feel that these claims are justified as they are really
customer-acquisition costs.

Fulfilment Costs

Fulfilment costs are the expenses involved in the warehousing, packaging and
shipping of goods.

Many dot-coms classify the fulfilment costs as “marketing expense”. This
enables dot-coms to hide operational costs among huge marketing costs.
Investors then believe that these costs are actually short term expenditures to
attract customers and these will cease once the company is better
established. What the investors do not know is that those hidden expenses
are actually large and permanent portions of the business structure.

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