Sales that are not yet sales.. 1833



  • I work for a large global public company and have the following situation:

    1. It is our quarter-end and my country and region are light on numbers (sales)
    2. My company (USA based) has shipped a large order from US to my country and is in transit (although realistically it is probably still in the USA)
    3. Our local distributor has been asked to invoice the equipment and to upload point of sale report showing that the reseller has received this equipment.
      Clearly risk and reward has not transferred and I am worried about being complicit in this transation although have been instructed to carry out this transaction by my managers, right up to VP level.
      This is the concern raised by the distributor in an email: ‘Are you happy for us to do this knowing that the risk and reward has not yet passed to the reseller and that this is probably in contravention of our agreement? We could raise an invoice, but the reseller will only accept the invoice once risk and reward has passed and we will only be able to recognise the revenue then. What would happen if your company does an audit on us between raising the invoice and risk passing to the reseller?’
      Can someone confirm the obvious?
      What course of action would you recommend? If needed, how do I blow the whistle without losing my job…??[/quote]


  • Hi John and welcome to the forums 🙂 My background is IT related, so I may not be correct in all points noted below.
    I want to essentially confirm the obvious as you’d noted – YES, to me this is clearly stretching things and outside the boundary lines of SOX. I’d even say it’s ‘cooking the books’, as you’re expressing income in one quarter that truly won’t be present until the next 😞 This ain’t acceptable in the world of SOX based controls.
    Based on the ethical dilema you’re facing, I’ll share some ideas:

    1. Not only is this a violation of SOX, but this jeapordizes a business relationship between the vendor. If I were the vendor, I’ might think ‘if they’re cheating on SOX requirements, I wonder what they might do to us in our own relationship?’
    2. If the SEC caught your company doing this, there might be thousands of USDUSDUSD in potential fines plus other punishments. While expressing income one quarter earlier than realized might be a little less serious than a true ficticious transactions, it’s still wrong.
    3. The only hope I have is that this fake invoice wasn’t delivered and this attempt to violate SOX standards didn’t succeed. I hope the vendor didn’t go through with this.
    4. Personally, I’d recommend working with your management on sharing any concerns at this point (if you even want to do that). You can stay low-key and just express concerns about potentially large fines from the SEC. While in theory, it seems like no ethical wrongs have occurred, SOX is very strict in it’s accounting rules for income and when folks start playing with matches, they’ll get burned.
    5. I’ve seen some multi-million USDUSDUSD fines rendered to large companies by the SEC, so that would easily erase any profits or income noted from the doctored up transaction.
    6. Hopefully, some of our SOX experts might share links on reporting unrealized sales too early.
    7. I’d recommend using SEARCH button above and enter whistleblower as a keyword. If you blow the whistle, you may keep your job but it could be a very miserable place to work with limited career potential etc. I would only use this in a worse case scenario when you’re unfairly fired or you’ve thought through the consequences and you’re gonna do it no matter what. Also, document, document, document …
    8. Hopefully, this is a very rare exception and I hope your management doesn’t try to repeat this mistake in the future. If so, I’d explore other employment opportunities.


  • I’m new to SOX, but I have encountered something similar to your scenario. Are you familiar with a ‘Bill and Hold’ arrangement between the buyer and seller? This may have been agreed to in advance. If this is the case, it sounds like you and your counterpart are out of the loop. My suggestion would be to question your company’s management team as if it is an honest transaction and ask for the ridiculous amount of backup that is required. It would be better than outright accusing them of wrongdoing. The reaction you get from them should tell you if they are deliberately being deceptive. Then you could approach the situation in a way like Harry’s point #4.
    For the record, I think a ‘Bill and Hold’ is only appropriate under very specific circumstances.



  • Thanks Phantom for sharing input on this 🙂
    In some ways, I could even see this sale in process being eligible for the current quarter, as the sales been made, the equipment is on it’s way, and the ‘check is in the mail’
    Still, the disturbing part of this is asking the local distributor to doctor up the paperwork to falsely show the item was received.
    A better would be to research ways of counting this ‘sales in process’ income now (i.e., where a true journal entry could be made, even though full handshaking on the transaction had not been completed). If you couldn’t achieve this, then it’s far better to count the sales in the next quarter, than to risk discovery of a falsified transaction with the SEC.



  • I’d be interested to know if the SEC monitors these types of forums for just this type of situation. I’m sure they have enough to contend with as it is and therefore probably don’t have the time and resources to monitor and follow up on these types of posts, however, if they did, the whistle may just have been inadvertently blown.



  • Still, the disturbing part of this is asking the local distributor to doctor up the paperwork to falsely show the item was received.

    I agree that it would be disturbing if this were true. There is no reason to falsely show an item received as far as I know.
    I have often questioned things when they appear to be unethical at best, and I have been wrong in my assumptions before.
    My advice would be to make sure the whole story is known.



  • Agree with what has been said already. The rules on revenue recognition are clear and, based on the information provided, this violates them.
    At best this is window dressing and at worst it’s fraud.



  • I wouldn’t call it window dressing… I would call it fraud no matter what…
    The best worst scenario depends on the knowledge from the person issuing the order



  • Does it make any difference because it is quarter end and not year end?
    (This is an honest question that highlights my very limited knowledge of US reporting requirements.)



  • Does it make any difference because it is quarter end and not year end?

    If it is fraud, then no, it does not make a difference.



  • Does it make any difference because it is quarter end and not year end?
    (This is an honest question that highlights my very limited knowledge of US reporting requirements.)
    No



  • Sorry did not phrase my question very well.
    If it was year end clearly this would be a problem because it impacts your financial reporting.
    At half year it would impact your interim figures I guess and therefore could be deemed a fraud because you are articfically inflating your figures to keep share prices high (though our auditors review our half year figures)
    For the other two quarters it would have no impact for us as all the reporting is internal so there is no material gain and no potential misstatement of our figures. But we are not US based.
    In the US do you have to publicly release each of your quarterly figures and therefore this would be fraud?



  • In the USA, public companies are required to report financial information on a quarterly basis. Therefore, any significant misstatement on the quarters would create an issue.
    It is still fraud to intentionally misstate financial information, even off of the periods where information goes public. Generally, the only reason to do this would be financial in nature - that is, a larger bonus, to show continuing sales growth from period to period, etc.


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