Last month Fiat Chrysler paid the SEC $40 million in penalties. The company had accumulated unreported sales in what FCA employees called a “cookie jar.” In months when FCA wanted its vehicle sales to appear better than they were, it dipped into the cookie jar to inflate sales numbers.
That scenario was strikingly similar to my own experiences with, well, let’s call it for what it is: accounting fraud.
I too had a cookie jar. It was a network of channel partners (as opposed to auto dealers) I could count on to take products that they didn’t need when I was close to my quarterly forecast but not quite there. Often, those products were shipped to warehouses where they might sit for months, or multiple fiscal quarters. The channel partners were invoiced and the sales recorded but those goods were not yet ready to be transferred and sold onto the final end-user. It’s often called “channel stuffing” or “distribution stuffing.”
Like Fiat Chrysler, after hitting my numbers in a reporting period, sales could be then be “backed out” in the next month. That involved taking invoiced goods back in a better fiscal period, where the negative impact to sales could be absorbed in a quarter when I was already beating my goals.
One person can’t make distribution stuffing happen. As I saw in my VP-Sales role, all kinds of support functions were involved. My orders had to be created and processed, people in finance had to generate the invoices (knowing they would not be paid anytime soon), and folks in manufacturing and shipping watched those spikes in orders that had to be out the door by the last day of the fiscal quarter, no questions asked. There were also people in the company who weren’t part of the accounting fraud but who saw it and didn’t ask any questions.
Tolerating distribution stuffing sends out the message that shortcuts are tolerated if they’re necessary to make the numbers. And for most compliance leaders, those shortcuts are often walled off as “business decisions” that aren’t related to compliance — and therein lies the peril for everyone.
There’s a relatively easy test to uncover distribution stuffing. Take your sales forecasts, by reporting period, for the past few years and chart them. It can be for the entire sales organization or a region. Then take the actuals and plot them, side-by-side, broken down by week, or even by day, over that same time-period.
Peaks or spikes right before the expiry of a fiscal period, and valleys right after, could be the result of timing of the market. For example, some product sales are cyclical, with revenue low during the summer, and higher towards year end spending, and that’s natural. But after backing those out, if the peaks and valleys are still there, quarter after quarter, that could indicate something more troubling.
In that case, it’s time to have some conversations. There are always people at various levels of the organization who see and hear a lot. Have you ever stopped by the shipping and receiving room the last days of a fiscal period just to watch? Or approached someone in sales order processing who might have an unusually high stack of orders to process, and just asked about them what’s happening?
Those and other support functions can be great sources of compliance information. Beyond that, the people in those functions can become ethics and integrity ambassadors, once they’re empowered with both the role and responsibility that comes with it.