In my previous post, I pointed out that Groupon’s accounting doesn’t make sense and it is a gimmick to fool the average investor. Soon behold, SEC is now looking into Groupon’s accounting methods that raised eyebrows among investors and SEC itself.

Here is the problem in plain English.

Groupon’s gross profit accounts for the amount paid to the deal merchant, the share, but doesn’t account for marketing and other expenses associated with the deal. Formula is, Revenue – Expenses = Gross Profit. According to Groupon, it’s Revenue – Some Expenses = Gross Profit. Get it?

It’s avoiding real expenses incurred to look more profitable.

Groupon spends a lot of money on marketing and hiring writers who provide the copy for the deal. It faces a lot of competition and it tackles that by spending more and more on marketing. More marketing leads to more deal merchants who then have to wait to get paid after the deal is over. Then, Gropon needs new deal merchants to pay-off previous deal merchants. If, by now you think this sounds like a ponzi scheme, then, you would be right.

New influx of money (IPO) will help them pay of deal merchants and spend more on marketing to bring in more revenue. As soon as money inflow stops, the house will come down.

For once, I am glad, SEC is doing its due diligence. Here is an infographic, interestingly named “Grouponzi.”

IPO Watch: Grouponzi