channel stuffing
a trading channel is a channel drawn on a security price series ...
in industry parlance, what the sec is looking for is
channel - stuffing .
channel - stuffing is one of the most tempting — and most disastrous — ways that companies cook their books .
channel stuffing. investorguide. com. webfinance, inc. urltoken (access: july 4, 2018) .
channel stuffing is a deceptive business practice used by a company to inflate its sales and earnings figures by deliberately sending retailers along its distribution channel more products than they are able to sell to the public. channel stuffing typically would take place just before quarter - end or year - end so that management, fearful of bad consequences to their compensation, can' make their numbers' .
understand what a distribution channel is and how companies use them to move product. learn how to make a distribution channel... read answer > >
at no time during 2000 or 2001 did bristol - myers disclose that (1) it was artificially inflating its results through channel stuffing and improper accounting; (2) channel - stuffing was contributing to a buildup in excess wholesaler inventory levels; or (3) excess wholesaler inventory posed a material risk to the company' s future sales and earnings .
in the meantime, it' s worth knowing what channel - stuffing actually is. it' s an interesting — and common — business phenomenon, but most people don' t know that it exists. channel - stuffing can occur in almost any type of retail operation where products have to be shipped to retail sellers before they' re actually bought by the public .
by channel stuffing, distributors temporarily increase sales figures and related profit measures for a particular period. this activity also causes an artificial bump up of accounts receivables. however, unable to sell the excess products, retailers will send back the surplus goods instead of cash to the distributor, who then must readjust its accounts receivable (if it adheres to gaap procedure) and ultimately its bottom line. in other words, stuffing always catches up with the company, because it cannot maintain sales at the rate it is stuffing. channel stuffing is not confined to the wholesale and retail trade; it can take place in the industrial sector, high tech industry, and pharmaceutical industry as well. valeant pharmaceuticals is an egregious example of a company found guilty in 2016 of channel stuffing .
the problem with channel - stuffing is that although it makes a company' s books look great in the short - term, in the long - term it' s a sort of internal ponzi scheme: eventually it comes crashing down. in the us, it is a criminal offence: two medical device executives went to prison last year for 10 - and 20 - year stretches after they were found guilty of channel - stuffing .
in addition, as a result of its channel - stuffing, bristol - myers materially understated its accruals for rebates due to medicaid and certain of its prime vendors, customers of its wholesalers that purchased large quantities of pharmaceutical products from those wholesalers .
this sort of practice, called channel stuffing or trade loading, is often borne from the pressure of meeting sales targets. sales are recorded on shipment, thus the sales target is met in the short term. in the longer term, goods often end up being returned or sales in subsequent months are lower due to having ‘over - sold’ previously. this may seem harmless but would it still feel so to a buyer of a company which had been valued based on trading in a period where channel stuffing had occurred ?
a handful of commodity stocks continue to offer short - term trading opportunities as they move higher within a trend channel .
on august 4, 2004, the commission filed a civil action against bristol - myers alleging violations of the antifraud, reporting, books and records and internal controls provisions of the federal securities laws. the commission' s complaint alleged that, from the first quarter of 2000 through the fourth quarter of 2001, bristol - myers engaged in a fraudulent scheme to overstate its sales and earnings in order to create the false appearance that the company had met or exceeded financial projections set by the company' s officers (
targets
) and earnings estimates established by wall street securities analysts. bristol - myers inflated its results primarily by: (1) stuffing its distribution channels with excess inventory near the end of every quarter in amounts sufficient to meet sales and earnings targets set by officers (
channel - stuffing
); and (2) improperly recognizing about $ 1. 5 billion in revenue from sales associated with the channel - stuffing in violation of generally accepted accounting principles. when bristol - myers' results fell short of the wall street analysts' earnings estimates, the company used improper accounting, including
cookie jar
reserves, to further inflate its earnings. at no time during 2000 or 2001, did bristol - myers disclose that: (1) it was artificially inflating its results through channel - stuffing; (2) channel - stuffing was contributing to a buildup in wholesaler inventory levels; (3) the buildup in wholesaler inventory posed a risk to bristol - myers' future sales and earnings; or (4) the company was using
cookie jar
reserves to further inflate its results. in march 2003, bristol - myers restated its prior financial statements and disclosed its channel - stuffing activities and improper accounting .
facebook stock rallied to channel resistance above $ 190 after fourth quarter results and could trap late - to - the - party buyers in a reversal .
put that coffee down! coffee is for channel - stuffers! alec baldwin in the famous
always be closing
scene in the movie glengarry glen ross .
occurs when a company induces retailers along its distribution channel to substantially increase their purchases before they would, in the normal course, otherwise purchase products from a company .
the related plans can be quite ingenious – we’ve seen ‘secret’ warehouses used to store goods that are meant to have been shipped and side deals being done to force higher sales through at the year end. however, the repercussions of putting too many products into a distribution channel than the channel is able to sell can be far reaching .
artificially inflating current sales and earnings by shipping more goods than would normally be ordered. for example, an appliance manufacturer may inflate revenues and earnings in the current accounting period by shipping to retail stores more refrigerators, stoves, and dishwashers than the stores are likely to sell. the practice of channel stuffing borrows revenues and earnings from the future because overstocked customers will reduce orders in future periods .
these stocks have been within rising trend channels, but recently have broken the trend channel to the upside. such a breakout usually signals two potential outcomes: an acceleration of the trend ...
timothy l. warren, associate regional director of the sec' s midwest regional office, added ,
for two years bristol - myers deceived the market into believing that it was meeting its financial projections and market expectations, when, in fact, the company was making its numbers primarily through channel - stuffing and manipulative accounting devices. severe sanctions are necessary to hold bristol - myers accountable for its violative conduct, and deter bristol - myers and other public companies from engaging in similar schemes .
one of the chief responsibilities of a manager is to channel the talent and energy of each of his subordinates towards the meeting of corporate objectives. setting individual goals and monitoring progress against their achievement can be an extremely ...
according to the complaint, mcafee defrauded investors into believing that it had legitimately met or exceeded its revenue projections and wall street earnings estimates during the 1998 through 2000 period. in reality, however, mcafee had used a variety of undisclosed ploys during the period to aggressively oversell its products to distributors in amounts that far exceeded the public’s demand for the products. while engaging in this “channel stuffing, ” mcafee improperly recorded the sales to distributors as revenue. mcafee offered its distributors lucrative sales incentives that included deep price discounts and rebates in an effort to persuade the distributors to continue to buy and stockpile mcafee products. mcafee also secretly paid distributors millions of dollars to hold the excess inventory, rather than return it to mcafee for a refund and consequent reduction in mcafee’s revenues. in other instances, mcafee used an undisclosed, wholly - owned subsidiary, net tools, inc. , to repurchase inventory that mcafee had oversold to its distributors. all of these actions were inconsistent with generally accepted accounting principles and led to mcafee’s october 2003 restatement of its financial results for 1997 through 2003 .
bristol - myers inflated its results primarily by (1) stuffing its distribution channels with excess inventory near the end of every quarter in amounts sufficient to meet its targets by making pharmaceutical sales to its wholesalers ahead of demand; and (2) improperly recognizing $ 1. 5 billion in revenue from such pharmaceutical sales to its two biggest wholesalers. in connection with the $ 1. 5 billion in revenue, bristol - myers covered these wholesalers' carrying costs and guaranteed them a return on investment until they sold the products. when bristol - myers recognized the $ 1. 5 billion in revenue upon shipment, it did so contrary to generally accepted accounting principles .
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bristol - myers squibb company: lit. rel. no. 18822 / august 6, 2004
securities and exchange commission v. bristol - myers squibb company, civil action no. 04 - 3680 (d. n. j .) (filed aug. 4, 2004) (hochberg, j. )
the securities and exchange commission today announced that the honorable faith s. hochberg, united states district court judge for the district of new jersey has entered a final judgment order (
order
) against defendant bristol - myers squibb company in the above matter. the order, to which bms consented without admitting or denying the allegations in the commission' s complaint, provides the following relief :
a permanent injunction against future violations of certain antifraud, reporting, books and records and internal controls provisions of the federal securities laws .
monetary remedies for the benefit of shareholders, including a civil penalty of $ 100 million plus a $ 50 million shareholder fund .
various remedial undertakings, including the appointment of an independent advisor to review bristol - myers' accounting practices and internal control systems and periodically assess the status of remedial actions undertaken or planned by the company in those and other areas, such as financial reporting .
for further information, see litigation release no. 18820 (august 4, 2004) .
washington, d. c. , aug. 4, 2004 - - the securities and exchange commission today announced that it filed an enforcement action against bristol - myers squibb company, a new york - based company whose largest division, the u. s. medicines group, is based in new jersey. the commission' s complaint, filed today in the united states district court for the district of new jersey, alleges that bristol - myers perpetrated a fraudulent earnings management scheme by, among other things, selling excessive amounts of pharmaceutical products to its wholesalers ahead of demand, improperly recognizing revenue from $ 1. 5 billion of such sales to its two largest wholesalers and using
cookie jar
reserves to meet its internal sales and earnings targets and analysts' earnings estimates .
in settling the commission' s action, bristol - myers agreed to an order requiring it to pay $ 150 million dollars and perform numerous remedial undertakings, including the appointment of an independent adviser to review and monitor its accounting practices, financial reporting and internal controls .
stephen m. cutler, director of the sec' s division of enforcement, said ,
bristol - myers' earnings management scheme distorted the true performance of the company and its medicines business on a massive scale and caused significant harm to the company' s shareholders. the company' s conduct warrants a stiff civil sanction. as our investigation continues, we will be focusing on, among other things, those individuals responsible for the company' s failures .
from the first quarter of 2000 through the fourth quarter of 2001, bristol - myers engaged in a fraudulent scheme to inflate its sales and earnings in order to create the false appearance that the company had met or exceeded its internal sales and earnings targets and wall street analysts' earnings estimates .
when bristol - myers' results still fell short of the street' s earnings estimates, the company tapped improperly created divestiture reserves and reversed portions of those reserves into income to further inflate its earnings .
various remedial undertakings, including the appointment of an independent adviser to review, assess and monitor bristol - myers' accounting practices, financial reporting and disclosure processes and internal control systems .
securities and exchange commission v. mcafee, inc. , civil action no. 06 - 009 (pjh) (n. d. cal .) (january 4, 2006 )
the securities and exchange commission today filed securities fraud charges against mcafee, inc. (formerly known as network associates, inc .), a santa clara, california - based manufacturer and supplier of computer security and antivirus tools. the commission' s complaint alleges that from the second quarter of 1998 through 2000, mcafee misled investors when it engaged in a fraudulent scheme to overstate its revenue and earnings by hundreds of millions of dollars in violation of the federal securities laws. the complaint specifically alleges that, during the period 1998 through 2000, mcafee inflated its cumulative net revenues by $ 622 million and that, for 1998 alone, mcafee overstated revenues by $ 562 million (a misstatement of 131 percent) .
mcafee has consented, without admitting or denying the allegations of the complaint, to the entry of a court order enjoining it from violating the antifraud, books and records, internal controls, and periodic reporting provisions of the federal securities laws. the order also requires that mcafee pay a $ 50 million civil penalty, which the commission will seek to distribute to harmed investors pursuant to the fair funds provision of the sarbanes - oxley act of 2002. in addition, mcafee has agreed to appoint an independent consultant to examine and recommend improvements to mcafee’s internal accounting controls and revenue recognition and reserves practices to better ensure compliance with the federal securities laws. this proposed settlement is subject to court approval .
the complaint further alleges that mcafee took action to conceal the fraud from investors by, among other things, wrongly recording in its books the payments and discounts that it offered to distributors, and improperly manipulating reserve accounts to increase inadequate sales reserves and cover the costs of the distributor payments. the complaint alleges that mcafee defrauded investors by reporting false and materially misleading financial and other information in periodic reports, financial statements, and securities registration statements that mcafee filed with the commission, in press releases, and in other public statements .
the final judgment would enjoin mcafee from violating section 17 (a) of the securities act of 1933, sections 10 (b), 13 (a), 13 (b) (2) (a) and 13 (b) (2) (b) of the securities exchange act of 1934, and exchange act rules 10b - 5, 12b - 20, 13a - 1, and 13a - 13 thereunder .
this is the fourth lawsuit that the commission has filed in connection with fraudulent accounting issues at mcafee. see
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this fraudulent practice is usually done in an attempt to hit compensation targets, or to raise the value of the stock or prevent its fall upon release of quarterly or annual results .
learn how to trade channels, a chart pattern that tells you where to enter, where to exit and even how long the trade may take .
these stocks are all moving within trend channels. with prices of these stocks trading near the extremes of those channels, there' s an excellent trading opportunity .
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these stocks are currently trading near the bottom of trend channels but moving higher, presenting a buying opportunity .
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microsoft shares traded above $ 100 for the first time last week and could add to gains in the coming months .
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it doesn' t look good, the wsj says. diageo has recently seen the disappearance of a president and a cmo :
the inquiry coincides with a period of tumult in diageo' s executive ranks. the company announced in june that north american president larry schwartz would be retiring by the end of the year. since then, the company has also announced the departures of its chief marketing officer for north america and a president of national accounts in the u. s .
it recently named deirdre mahlan, currently chief financial officer, as president of diageo north america .
we are not saying this is what happened at diageo. let' s let the sec probe take its course .
let' s say you' re at a company where sales are in decline, but your bosses are insistent that you' ve got to show sales growth. you' d be tempted to fudge the numbers somehow. (in an amazing coincidence, that' s the situation at diageo. volume sold in the us last year decreased 1% ; the company only saw a sales increase of 3% to $ 5. 34 billion due to price increases. )
one way of showing more
sales
is to ship more cases of product to your distributors and retailers. you' ve got a pretty good expectation that they' re going to be sold eventually, so you book them as sales. hooray! sales are going up !
the problem is that next month, when you call up those distributors to ask how much new product they need, the reply is ,
well, because you shipped us slightly more than we needed last month, we' ve still got a bunch of stock sitting around. so this month we' d like you to ship fewer cases .
uh oh. that one - month sales bump you showed is now going to turn into a sharp decline in the following month. so maybe you' re tempted to ship extra product again, in the hopes that somehow sales will suddenly pick up dramatically and fix all your problems .
now you' re into real trouble, because you' re shipping products that no one wants, and booking them as revenue (even though the revenues never arrive). and those unsold cases are piling up at distributor warehouses .
this sounds like a great idea! and the distributor agrees. the unsold cases come back, and they can be written off against the original revenue as
sales returns ,
or something. they' re going to look like defective units or stuff that customers bought, didn' t like, returned and replaced with new product. and most people never look at the
sales returns
line in company accounts anyway .
like a ponzi scheme, this all comes crashing down. you end up shipping more product that can be sold, and accepting as returns more product than you sell, and eventually someone asks why it is that the company has become so unprofitable even though sales are growing .
and i thought that was not good because too much inventory might mess things up a bit .
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how badly do you want your year - end performance bonus? this is a question i was pondering today as we are hearing more frequently about individuals in companies who are engaging in activities that artificially inflate sales or shipments for the sake of hitting their targets. unfortunately, they don’t often think of this as fraud until it’s too late .
striking the right balance between setting ambitious revenue targets and incentivising people to ‘ do the right thing ’ is always a challenge. get it wrong, and someone will cross the line and ship those extra products or bring forward that big sale. get it right, and you will have a motivated team built on solid ethical foundations .
we are seeing more of these issues coming to light as individuals, placed under huge pressure to bend the rules by those afraid to deliver bad news, blow the whistle. and it is always worth bearing in mind, as we see every week in the press, that these issues, when they come to light, can have a big impact on the reputation of a business and life changing consequences for employees .
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an illegal practice in which a company willfully sells more of its product to distributors than the distributors can sell to customers. the company makes these sales on credit, which temporarily boosts its accounts receivable and by extension its current assets. this makes the company look healthier than it really is which can raise its stock price. eventually, when the distributors are unable to sell the product they return it to the company instead of paying, which reduces the accounts receivable and brings the company' s balance sheet in line with reality .
enhance current earnings at the expense of future sales, which leads to a slippery slope of needing to artificially boost future earnings as well .
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, but if there is a sense of pressure within the company to book revenue, past events have shown that not all the revenue was legitimate .
may work for awhile, however problems arise when high sales from past quarters are made at the expense of poor sales in another quarter .
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a fraudulent practice in which a company inflates its sales revenues by enticing wholesalers and / or retailers to order more product than they realistically expect to sell in the normal course of business. this is typically accomplished through extra - deep discounts and an understanding that the unsold product can be returned at a later date.
channel stuffing is a business practice in which a company , or a sales force within a company , inflates its sales figures by forcing more products through a distribution channel than the channel is capable of selling . also known as trade loading , this can be the result of a company attempting to inflate its sales figures . alternatively , it can be a consequence of a poorly managed sales force attempting to meet short term objectives and quotas in a way that is detrimental to a company in the long term . channel stuffing has a number of long-term consequences for a company . firstly , distributors will often return any unsold goods to the company , incurring a carrying cost and also developing a backlog of product inventory . wildly fluctuating demand , combined with this excess inventory , leads to costly overtimes and factory shutdowns . even mild channel stuffing can spiral out of control as sales works to make up for prior over-selling . discounts used to drive trade loading can greatly affect profits , and even help establish gray market channels as salesmen no longer adequately qualify their prospects . occasionally , distribution channels such as large retailers have been known to identify the practice of channel stuffing in their suppliers , and use the phenomenon to their advantage . this is done by holding back on orders until the end of the suppliers ' quota period . the supplier 's sales force then panics , and sells a large amount of the product under more favorable terms than they would under ordinary circumstances . at the beginning of the next period , no new orders are placed , and , barring any action , the cycle is then repeated . this affects customers , with gluts and shortages as buyers turn to competing products . corporations have been known to engage in channel stuffing and hide such activities from their investors . in the united states , the u.s. securities and exchange commission has in some cases litigated against such corporations , and private class-action suits have been engaged . channel stuffing might also be part of a broader set of financial improprieties . 
channel stuffing is a business practice in which a company, or a sales force within a company, inflates its sales figures by forcing more products through a distribution channel than the channel is capable of selling. also known as trade loading, this can be the result of a company attempting to inflate its sales figures. alternatively, it can be a consequence of a poorly managed sales force attempting to meet short term objectives and quotas in a way that is detrimental to a company in the long term. channel stuffing has a number of long-term consequences for a company. firstly, distributors will often return any unsold goods to the company, incurring a carrying cost and also developing a backlog of product inventory. wildly fluctuating demand, combined with this excess inventory, leads to costly overtimes and factory shutdowns. even mild channel stuffing can spiral out of control as sales works to make up for prior over-selling. discounts used to drive trade loading can greatly affect profits, and even help establish gray market channels as salesmen no longer adequately qualify their prospects. occasionally, distribution channels such as large retailers have been known to identify the practice of channel stuffing in their suppliers, and use the phenomenon to their advantage. this is done by holding back on orders until the end of the suppliers' quota period. the supplier's sales force then panics, and sells a large amount of the product under more favorable terms than they would under ordinary circumstances. at the beginning of the next period, no new orders are placed, and, barring any action, the cycle is then repeated. this affects customers, with gluts and shortages as buyers turn to competing products. corporations have been known to engage in channel stuffing and hide such activities from their investors. in the united states, the u.s. securities and exchange commission has in some cases litigated against such corporations, and private class-action suits have been engaged. channel stuffing might also be part of a broader set of financial improprieties.
channel stuffing is a business practice in which a company, or a sales force within a company, inflates its sales figures by forcing more products through a distribution channel than the channel is capable of selling. also known as trade loading, this can be the result of a company attempting to inflate its sales figures. alternatively, it can be a consequence of a poorly managed sales force attempting to meet short term objectives and quotas in a way that is detrimental to a company in the long term. channel stuffing has a number of long-term consequences for a company. firstly, distributors will often return any unsold goods to the company, incurring a carrying cost and also developing a backlog of product inventory. wildly fluctuating demand, combined with this excess inventory, leads to costly overtimes and factory shutdowns. even mild channel stuffing can spiral out of control as sales works to make up for prior over-selling. discounts used to drive trade loading can greatly affect profits, and even help establish gray market channels as salesmen no longer adequately qualify their prospects. occasionally, distribution channels such as large retailers have been known to identify the practice of channel stuffing in their suppliers, and use the phenomenon to their advantage. this is done by holding back on orders until the end of the suppliers' quota period. the supplier's sales force then panics, and sells a large amount of the product under more favorable terms than they would under ordinary circumstances. at the beginning of the next period, no new orders are placed, and, barring any action, the cycle is then repeated. this affects customers, with gluts and shortages as buyers turn to competing products. corporations have been known to engage in channel stuffing and hide such activities from their investors. in the united states, the u.s. securities and exchange commission has in some cases litigated against such corporations, and private class-action suits have been engaged. channel stuffing might also be part of a broader set of financial improprieties.