Yes, I believe their COO should have known better. They were booking the entire price of the Groupon as revenue without subtracting out the merchant's cut, if I am remembering right. An error that they should have caught long before now, unless it was intentional?
According to some merchants I've talked to who have used social networking sites such as Groupon and Living Social, the merchants' cut is so small that it's virtually insignificant. Merchants use these sites to advertise and to bring new customers into their stores, restaurants, etc., not for revenue production.