He explained that as part of a major system upgrade in 2005 that included its accounting system, one change was that instead of recording refunds to customers in batches, it now recorded them transaction-by-transaction.

"When we issue a customer refund, the refund reduces the amount of cash we receive from our credit card processors and, as a result, our financial system should reduce our accounts receivable balance," Chidester said. "After the implementation, in the instance of some customer refunds, this reduction wasn't happening, and we didn't catch it."

He said that the company uses internal "reason codes" to track the reasons it gives customer refunds. Trouble was, under the new system not all reason codes were automatically recorded. Some customer refunds required manual entry in the financial system.

"We set up automatic and manual processes so that these would be recorded," Chidester elaborated. "Unfortunately, we missed some of the manual customer refunds, and as a result, we did not record all that were occurring."

Over time, this error built up and, on a cumulative basis, eventually became material, he conceded.

Separately, the finance executive said that on a much smaller scale, the company found that the system did not reverse out shipping revenue for cancelled orders as it should have, and these $2.95 charges also added up over time.

Chidester also pointed out that these errors were partially masked by an offsetting error that made overall cost of returns appear reasonable. Over the past two years Overstock under-billed its fulfillment partners for some returns-related costs and fees, he said.

"In other words, we weren't recording some customer refunds and we weren't recouping some costs from partners on some returns," he added. "The combined result was that our returns costs looked reasonable. We have corrected the under billing problem and are initiating a process to collect a portion of the amounts owed, which we will record as we receive them."