By now you've seen the headlines. Groupon (Nasdaq: GRPN) inflated fourth-quarter revenue by $14.3 million thanks to a "material weakness" in its accounting systems. A restatement is forthcoming, the second such change in seven months.

Fast-forward three days, and we're now hearing rumblings of an SEC inquiry that could become an investigation. CEO Andrew Mason took a turn on 60 Minutes, calling the error a "bush-league mistake." Too true, but also not the problem with Groupon as a business.

Neither is the high cost of acquiring customers. Nor competition from Google and its Offers service nor Microsoft's MSN Offers experiment here in the United States. Nor are Renren (NYSE: RENN) and a growing number of imitators in China and across the globe, as important as they seem. These factors matter, but they also pale in influence to the power that merchants wield.

The good old days of great terms
Rewind to November. At the time, I wrote of how Groupon was generating huge sums of cash via favorable contract terms that allow the company to stiff-arm merchants for 60 days after issuing Groupons on their behalf, and sometimes much longer.

The resulting cushion allows management to fund working capital needs from reserves. Think of it as akin to the "float" insurance companies keep on hand in lieu of paying claims to clients. Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B) has long used similar reserves from its own insurance operations to fund investments in publicly traded stocks. And in case you hadn't noticed, this recipe has worked out pretty well for Berkshire and its shareholders. At Groupon, management simply socks away the excess cash, the source of which is known as "accrued merchant payables." Here's a closer look:

Accrued Merchant Payables

2010*

2011*

YOY Growth

Balance Sheet Total

 $162,409 $520,723 220.6%

Contribution to Cash Flow

 $149,044 $380,108 155.0%

Cash From Operations

 $86,885 $290,447 234.3%

As a % of Cash From Operations

171.5% 130.9% (40.6%)

Sources: Securities and Exchange Commission filings. *Numbers in thousands.

See the problem? As goes merchant payables, so goes Groupon's cash flow and thereby its ability to fund operations and long-term growth.

None of this would be so troubling if Groupon delivered sustainable value to merchants, kept churn low, and avoided rebates. Yet the opposite appears to be occurring. Groupon's "material weakness" derives from under-reporting the potential impact of refunds on larger deals.

Now imagine what happens when value-conscious merchants decide to renegotiate. Payment terms will tilt unfavorably. Margins will shrink. And the "float," which serves Groupon so well right now -- the one that allows it to take on Google and Microsoft -- will disappear.

Groupon is still going down, and the reason why hasn't changed. So stop projecting competitive fears and howling about a history of restatements. Look at the contracts. Look at the cash flow. Weakness abounds, and it's easy enough to see. So easy, in fact, that earlier today I backed up my take with a bearish CAPScall.

A better buying opportunity
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