A letter to stockholders from Overstock's senior vice president of finance, David Chidester, contains a more detailed account of what allegedly went wrong.

"As part of this accounting system upgrade we changed from recording refunds to customers in batches to recording them transaction-by-transaction," Chidester said. "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. After the implementation, in the instance of some customer refunds, this reduction wasn't happening, and we didn't catch it."

Overstock uses internal "reason codes" that show why various customers get refunds, Chidester added.

"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," he said. "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."

In addition, the company learned that the system failed to "reverse out" shipping revenue for cancelled orders, "and these $2.95 charges also added up over time."