Fraud and Forensics

1. Group Project: Case Study 1.
1.What was the first period that
the SEC believed that BristolMyers
(BM) “stuffed the channels?” From
the first quarter of 2000 through the
fourth quarter of 2001, BM 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. As a
conclusion what was mentioned above,
the first period that the SEC believed
that BM SC was the first quarter of
year 2000.
2.Was channel stuffing the only
scheme perpetrated by BM? If the
answer is “no,” name one other
scheme. No. First, channel stuffing was
not the only scheme perpetrated by BM.
Second, they also attempted to create a
deal with rival company Apotex Inc.
Third, using "cookie jar" reserves to
meet its internal sales and earnings
targets and analysts' earnings estimates.
As a consequence, BM inflated
earnings, created improper revenue
recognition, and failed to accrue
properly.
3. What were the names of the
marketing efforts that helped drive
the need to channel stuff? According
to the SEC court papers, the alleged
scheme grew out of ambitious company
programs known as "Double Double" and
"Mega-Double," designed to ramp up
sales and earnings starting in 1994.
Moreover, these marketing´s programms
helped to achieve company´s goal such as
double sales, earnings.
4. What was the total amount of fines
and penalties levied against BM? June
8, 2006: $750 million ($150 million BMS
paid to settle fraud charges brought by the
Commission, $300 million BMS paid to
settle a related civil class action, and
$300 million paid by BMS in a deferred
prosecution agreement with the U.S.)
June 16, 2005: BM has doled out about
$800 million to settle lawsuits and
investigations tied to the incentives it
paid wholesalers to stockpile inventory,
inflating sales and earnings. Aug. 4,
2004: BM has agreed, without admitting
or denying the allegations in the
Commission's complaint to the following
relief: disgorgement of $1, a civil penalty
of $100 million, an additional $50 million
payment into a fund for the benefit of
shareholders.
Total amount =
750+1+100+50+800= $1.701
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1
prepared by
TEAM 3
Antonia Ficova
antonia.ficova@yahoo.com
Allen Tung
allentung.adhoc@gmail.com
Norman Yau
nyau1991@gmail.com
minimum contribution from:
Vijay Shakti Aggarwal
fxvijay1691@yahoo.co.in
Abreviations

2. 5. What makes channel stuffing illegal by
comparison to a car dealership that runs “mega”
end of year sales? First, these practice CS means
using incentives to get wholesalers to buy more
products than needed. Second, they sold excessive
amounts of pharmaceutical products to its
wholesalers ahead of demand, on the other hand CS
was contributing to a buildup in excess wholesaler
inventory levels. Third, excess wholesaler inventory
posed a material risk to the company's future sales
and earnings. If we look at results of BM, they are
driven primarily by 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. When BM recognized the $1,5 billion in
revenue upon shipment, it did so contrary to
generally accepted accounting principles.
Consequently, when BM' results still fell short of
the Street's earnings estimates, the company illegal
tapped improperly created divestiture reserves and
reversed portions of those reserves into income to
further inflate its earnings.
6. Why are revenue recognition frauds such a
frequent problem for the SEC? First,
misstatements of revenue recognition result in large
drops in market capitalization and require costly
and time consuming restatements. Second,
overstatement of revenues, either premature revenue
recognition or fictitious revenue played important
role in frauds. Finally, it is important to note term of
accounting manipulation. Due to fact that current
economic environment where companies are
struggling to achieve revenue forecasts, it is critical
that auditors conduct adequate and appropriate audit
procedures on revenues that may resulted problems
for the SEC.
7. What red flag symptoms might revenue
recognition create and how might one best
discover a revenue recognition fraud? If we focus
on Red flags, it is necessary to point out that
Revenue Recognition or timing schemes, are also
known as improper treatment of sales. However,
this fraud category is possibly the most common
form of financial statement fraud, usually employed
when management seeks to conceal the real
numbers for a weak quarter or two. If a sale is
legitimate, but is posted prematurely, the red flag
would be a GAAP violation by early recording of
the sale. Similarly CS means where sales are
recorded before they’ve actually been made, on the
other hand would be indicated by an excessive
number of subsequent period returns of
merchandise, accompanied by an unusual jump in
credits. As a consequence, we need to reduce the
risk of having these frauds occur or continue
undetected auditors should use such practices ash
orizontally and vertically analyzing all financial
reports, conducting frequent ratio analysis,
including assessment of trends over periods of
several years.
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Online sources available at:
http://www.sec.gov/news/press/2004-105.htm, 22 July 2012
http://online.wsj.com/article/0,,SB111885017740160374,00.html, 23 July
2012http://www.eastlaw.net/corpgov/us/ImClone/AR2006091200578_pf.html,
23 July 2012
http://www.washingtonpost.com/wp-
dyn/content/article/2005/08/22/AR2005082201642.html, 23 July 2012
http://accounting.smartpros.com/x48600.xml, 22 July 2012
http://www.marketwatch.com/story/bristol-myers-squibb-urged-to-
dump-ceo-report-says, 22 July 2012
http://www.washingtonpost.com/wp-
dyn/content/article/2005/08/22/AR2005082201642.html, 23 July
2012
http://www.sec.gov/news/speech/spch495.htm, 23 July 2012