SEC Widens Its Net to Include 'Channel Stuffing'

On July 11, 2002 Bristol-Myers Squibb, one of the world's largest pharmaceutical companies, confirmed that the Securities and Exchange Commission (SEC) has launched an "informal inquiry" into its sales practices. According to a report published by the Wall Street Journal, the central issue is whether the company improperly inflated revenues through the use of sales incentives in a practice commonly known as "channel stuffing." ("Bristol-Myers Faces SEC Probe Into 'Channel Stuffing' in 2001," July 11, 2002)

"Channel stuffing" refers to the practice of building inventories in distribution channels. It is a way to equalize the uneven demand from wholesalers that has long plagued the pharmaceutical industry. The incentive to build inventories can be as simple as a hint of a forthcoming price increase for a product. This technique has never been considered illegal or improper in the past. But observers say the SEC may be changing its stance on some long-standing practices as it toughens its attitude toward financial malpractice.

The SEC's investigation was precipitated by an announcement by Bristol-Myers Squibb in April 2002. At that time, management disclosed that wholesalers were holding hundreds of millions of dollars in excessive inventories of its products and the company's earnings for 2002 may be just half of its 2001 earnings as wholesalers work down excessive inventories. That same month, the company's chief financial officer resigned.

Analysts estimate the excessive inventories, which were recorded as sales in 2001, total $1 billion or more. Some analysts reportedly say they are particularly frustrated by the fact that Bristol-Myers Squibb did not warn them about the excess inventories, and they say management still refuses to disclose how it is compensating wholesalers for the inventory glut. Barbara Ryan, a managing director at Deutsche Bank, says, "Nobody feels they know what is going on with this company."

In its press release, Bristol-Myers Squibb emphasized that, "the SEC has not stated to the company that it has done anything improper in connection with the inventory situation... As previously reported, the company is continuing to work cooperatively with domestic wholesalers and product partners to aggressively reduce excess inventory levels. The reduction plan is well underway."

-Rosemary Schlank

You may like these other stories...

A proposal issued by the Governmental Accounting Standards Board (GASB) last week explains how fair value measurement should be defined for state and local government financial reporting.The exposure draft, Fair Value...
By Jason Bramwell The board of trustees of the Financial Accounting Foundation (FAF) finalized a new policy on November 19 that provides the Governmental Accounting Standards Board (GASB) with direction on what...
By Jason Bramwell The Governmental Accounting Standards Board (GASB) is now offering a free online toolkit designed to assist preparers and auditors of state and local government pension plans with implementing new...

Upcoming CPE Webinars

Jul 24
In this presentation Excel expert David Ringstrom, CPA revisits the Excel feature you should be using, but probably aren't. The Table feature offers the ability to both boost the integrity of your spreadsheets, but reduce maintenance as well.
Jul 31
In this session Excel expert David Ringstrom helps beginners get up to speed in Microsoft Excel. However, even experienced Excel users will learn some new tricks, particularly when David discusses under-utilized aspects of Excel.
Aug 5
This webcast will focus on accounting and disclosure policies for various types of consolidations and business combinations.