how channel stuffing works
channel stuffing refers to the practice of a company shipping more goods to distributors and retailers along the distribution channel than end users are likely to buy in a reasonable time period this is usually achieved by offering lucrative incentives including deep discounts rebates and extended payment terms to persuade distributors and retailers to buy quantities in excess of their current needs usually distributors retain the right to return any unsold inventory which calls into question whether a final sale has actually occurred stuffing the distribution channel is frowned upon by the securities and exchange commission sec as a practice used by companies to accelerate revenue recognition to reach short term revenue and earnings targets and as such misleading to investors 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 the pharmaceutical industry as well valeant pharmaceuticals is an egregious example of a company found guilty in 2016 of channel stuffing channel stuffing accusations have also been levied against the automobile industry which sends too many new cars to dealerships than demand warrants in order to inflate sales figures 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 an example of channel stuffingin august of 2004 pharmaceutical company bristol meyers squibb nyse bmy agreed to pay 150 million to settle a channel stuffing suit by the sec 1court documents reveal the following in addition to paying its multi million dollar fine in march 003 bristol myers restatedpior financial statements and disclosed its channel stuffing activities and improper accounting 2