SEC Settles Earnings Management Case Against Bristol-Myers Squibb

News Brief

By: Cydney Posner

The SEC is actively pursuing earnings management cases. Today, the SEC announced that it had filed an enforcement action against Bristol-Myers Squibb for engaging in a fraudulent scheme to inflate its sales and earnings to create the false appearance that the company had met or exceeded its internal sales and earnings targets and Wall Street analysts' earnings estimates. Bristol-Myers agreed to an order requiring it to pay $150 million and take various remedial actions, including the appointment of an independent adviser to review and monitor its accounting practices, financial reporting and internal controls.

The SEC alleged that Bristol-Myers engaged in the following misconduct:

  • From the first quarter of 2000 through the fourth quarter of 2001, Bristol-Myers inflated its results primarily by
    • stuffing its distribution channels with excess inventory near the end of every quarter in amounts sufficient to meet its targets by making sales to its wholesalers ahead of demand; and
    • improperly recognizing $1.5 billion in revenue from these sales to its two biggest wholesalers, contrary to GAAP.
  • In connection with the $1.5 billion in revenue, Bristol-Myers covered these wholesalers' carrying costs and guaranteed them a return on investment until they sold the products.
  • When Bristol-Myers' results still fell short of the street's earnings estimates, the company tapped improperly created divestiture reserves and reversed portions of those reserves into income to further inflate its earnings.
  • Bristol-Myers did not disclose during 2000 or 2001 that
    • it was artificially inflating its results through channel stuffing and improper accounting;
    • channel-stuffing was contributing to a buildup in excess wholesaler inventory levels; or
    • excess wholesaler inventory posed a material risk to the company's future sales and earnings.
  • In addition, as a result of its channel-stuffing, Bristol-Myers materially understated its accruals for rebates due to Medicaid and certain of its prime vendors.
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