In its Q3 2022 filing, Overstock (OSTK), an online retailer, revealed accounting errors made in the prior two quarters related to the value of its equity method securities. The out-of-period errors— $31.4 million in Other Expense plus a $3.6 million increase in income tax benefit— were corrected in the latest quarter, increasing Overstock’s Q3 loss by $27.8 million.

In blaming an unnamed third party, Overstock’s language in the filing sowed a bit of doubt as to who is really at fault for the errors. The company attributed the adjustments “primarily” to the other party, suggesting Overstock bears some responsibility as well.

Notably, Overstock cited the error when disclosing a related material weakness in its internal controls later in the filing. In doing so, Overstock provided additional detail regarding the error, saying it lacked a control necessary to identify Restricted Stock Units (RSUs) that had been granted at an equity method investee.

Even more important though, Overstock’s management determined the correction was not material to any of its previously filed financial statements.

We disagree.

In reviewing financial statements from the prior two quarters, Overstock’s net income appears to have been significantly overstated due to the error. In fact, Overstock’s first half reported profit is actually a loss when the error is corrected.

In the first and second quarters of 2022, Overstock reported net income of $10.1 million and $7.1 million, respectively. The $27.8 million error is 161.6% of the net income Overstock reported cumulatively in the prior two quarters. Instead of earning $17.2 million in the first half, Overstock actually lost $10.6 million.

In our view, it’s undeniable the error would have significantly altered a reasonable investor’s perception of Overstock’s performance in the first and second quarters. Under this interpretation— SAB No. 99— the error is material and requires a Big R restatement.

DuDil has contacted Overstock to better understand why the company believes the error was immaterial. With Overstock reporting $46.6 million of unrealized losses on equity method securities in the latest quarter, we’ve also inquired as to whether the unnamed third party blamed for the bulk of the error is still being relied upon to provide valuation services. We’ll update members when new information is developed.