Channel Stuffing Scandals: Pharmaceutical Company And Coca-Cola

III. Channel Stuffing Scandals There have been numerous organizations that have been accused of channel stuffing in the past and more than likely numerous others that will be accused of it in the future. This particular fraudulent practice was observed in the auto industry, the pharmaceutical industry, and even the refreshment industry. We will discuss the accusations brought against the pharmaceutical company, Bristol-Myer Squibb, and the refreshment company, Coca-Cola.
A. Bristol-Myers Squibb
Bristol-Myers Squibb is a pharmaceutical company based out of New York; its largest division, which is located in New Jersey is called the U.S. Medicines Group. On August 4, 2004, the Securities and Exchange Commission (SEC) filed a legal complaint

The SEC accused Bristol-Myers of inflating its earning between 2000 and 2001 (SEC, 2004). They accused Bristol-Myers of doing this so that it would appear that they had met their sales and earnings goals and also met the Wall Street analysts’ earnings estimates (SEC, 2004). Bristol-Myers was accused of offering discounts or other incentives to their wholesalers to buy excess products to accomplish these goals. Bristol-Myers was accused of recognizing sales of $1.5 billion; they recognized these sales when the product was shipped to two of its largest wholesalers, recognizing the revenue when it was shipped goes against what the Generally Accepted Accounting Principles states (SEC, 2004). Even with shipping out excess product to their wholesalers, Bristol-Myers still fell short of its goal and had to dip into what they call a “cookie jar” fund and use $223 million to help inflate the rest of its revenue in 2000 and 2001 (Dash, 2004). The SEC also alleges that at no time during this period did Bristol-Myers disclose any of this information regarding their channel stuffing or inappropriate accounting procedures. The SEC also feels that

Between 1997 and 1999 the Coca-Cola Company used a practice known as gallon pushing in Japan, which is nothing but a channel stuffing scheme used to pull sales forward into the current period (SEC, 2005). Also in January of 2000, the SEC found false and misleading statements in the Coca-Cola Company’s Form 8-K. Coca-Cola listed an inventory reduction as a joint venture with its bottlers, in reality, this was solely a decision made by Coca-Cola. It also failed to disclose how this inventory reduction would impact the earnings (Drye, 2005). The SEC also found in the Coca-Cola Form 10-K and 10-Q that they had failed to disclose any information about the gallon pushing that was taking place in Japan and the impact it could have, thus misleading the investor (Drye, 2005). Of course, the Coca-Cola Company did not admit or deny any of these allegations, but they did consent to a cease-and-desist order (SEC, 2005). The Coca-Cola Company agreed to undertake certain steps to help prevent any future violations. They agreed to maintain an Ethics & Compliance Office, they also agreed to a Disclosure committee that would assist the CEO and CFO in fulfilling their duties. They are going to keep ten years of documentation for their Form 8-K, and they are also going to adhere to the