Question

When Cutter & Buck revealed two weeks ago that it padded sales figures in 2000 by recording $5.8 million in shipments that were mostly returned, the news came as a surprise to many investors. But it wasn’t the first time the Seattle sportswear retailer’s shipping and accounting practices have been called into question. Shortly before co-founder Joey Rodolfo left in 1997, he accused the company of shipping orders months before customers were expecting them, a method of prematurely booking sales.

Some customers and former employees say early shipments persisted for years after Rodolfo raised the issue. And late last week, Chief Executive Fran Conley said an internal investigation has found that early shipments were “more extensive than I had known” and may force the company to further restate sales figures.

Shipping and booking orders ahead of schedule to meet short-term sales goals — a practice sometimes called channel stuffing — is not, by definition, illegal. But by essentially borrowing from future sales to claim bigger current sales and profit, it can be used to boost a company’s bottom line and create a misleading appearance of growth for investors.

This article provides a good way to introduce the topic of channel stuffing. When a company stuffs the channel, it ships inventory ahead of schedule, filling its distribution channels with more product than is needed. Since companies often record sales as soon as they ship products, channel stuffing can make it appear that business is booming.

1. Is this practice legal and why?
2. Is it an acceptable practice according to GAAP and why?
3. Is it an ethical practice or not and why?

Answer 1

Qn1. Is channel stuffing practice legal and why ?

Ans: Channel stuffing is not illegal according to any statue. Channel stuffing is an acceptable business strategy in some cases. Eg: If a company have large stock of inferior goods (like vegetables, expiring medicines within a short period. In such cases, channel stuffing is an acceptable business strategy. Hence, it is not illegal.

Qn2 . Is it an acceptable practice according to GAAP and why?

Ans: Channel stuffing is a business strategy in case of inferior goods as we said earlier. However, it is a tool/procedure of window dressing. Window dressing means creating a better financial position in balance sheet, but the reality is completely different. Window dressing is not a Generally Accepted Accounting Practice. Hence, channel stuffing is not a GAAP.

Qn3. Is it an ethical practice or not and why?

In case of inferior goods, it is an ethical business strategy to reduce loss and beneficial to the investors, creditors and other stakeholders too.

However, if channel stuffing is used to create large sales and large revenue for earning commissions, loans, investments and anything by way of window dressed financial statements, then it is not an ethical practice. It is not beneficial for any immediate stakeholders in long-run.