Fudging Sales Forecasts 1769

  • I am currently working for a company that has directed me to fudge sales forecasts so management can present forecasts to investors. Does any one know if this is a violation in any way of the sarbanes oxley act? I received a management sales report 1 week before the sales forecasts were do showed we had sold 0 units of this medical capital equipment. On the report it showed there goal as 79 units sold for 2007.

  • Well, firstly lets not use the term ‘fudge’ as it implies some sort of acceptability. Putting aside the materiality of what you describe, in principle this is FRAUD.
    And YES, it could cause a SOX problem, if:
    a. the company is a public company, and
    b. the false information is in an SEC filing
    The penalty for knowingly and wilfully presenting false financial information is up to 20 years in jail.
    If the company is not a public company and the information is not in an SEC filing it is still fraud. This type of activity could leave the company open to both criminal and civl action.

  • thanks for the reply. Yes is a public company. Not sure if it will be in an SEC filing or not. I was just told investors would see the forecasts that are untrue (Frauded). What SEC filings would forecasts go into? and also cant the company turn around to me or any one and say well there just forecasts, estimates or goals of sales forecasted?

  • Well forecasts and goals are different things.
    Knowingly presenting false information and saying ‘it’s just a forecast’ doesn’t cut it. Not least because the market will look to hold you to account for your forecasts i.e. you will be expected to meet them and when you don’t the share price may be affected:
    nightmare scenario a - investors find out you knowingly submttted false forecasts and hey presto class action lawsuit
    nightmare scenario b - SEC finds out = criminal lawsuit
    nightmare scenario c - management ‘fudge’ accounts to meet forecast and the company implodes in a wave of accounting scandals

  • with that in mind so you see a sarbanes-oxley violation?
    and what SEC filing would they put this in?
    who do you report this kind of thing to?
    What do you recommend as the best way to handle this? I am thinking about resigning from the company. I really dont want to be a whistle blower you know?

  • This likely will not go into the audited financial statements that are included as part of the scope of section 404 on internal controls over financial reporting.
    Most likely, this schedule would not be attached to any SEC filings. It may be referenced in a form 8K if the Company issues a new revenue or earnings forecast for teh upcoming year and published on the company’s website.
    Concerns should generally be reported to your company Legal or Internal Audit department.
    You are correct in expressing a concern. Do you feel that you have enough information to know that the forecast is ‘fraudulent’? Just because you have not sold a product does not mean that you cannot have sales goals. Now, if the internal management forecasts are lower than the external forecasts provided to investors, you do have cause for concern. If internal forecasts are higher, there generally is no cause for concern as management usually hedges a bit on forecasts in order to give them some breathing room if sales are below forecast.

  • thank you for your help

  • Most SEC filings contain forward looking data. And whilst this is not covered by management’s assessment for s404 and the audit thereon - there are other sections which may be relevant e.g. ss 302, 401, 406, 408, 409, 807 and probably all of Titles IX and XI.

  • YOu may need to consider any requirements that your Auditor may have to look at forecasts in order to cover the Going Concern Concept.
    I would agree with Kymike, however, that any cause for concern should only be based on a lack of evidence to support their expectations. It may be, for example, that a new contract is about to be signed.

  • I agree with the good commentary from our SOX experts and I learned a few things myself in this discussion 🙂 As a business has ethical obligations to it’s stakeholders, I’d offer the following even if it’s not SOX related:

    • The projected sales for 2007 should be made as realistic as possible on anything that is presented to the general public . If the ‘increase’ is for aggressive sales goals next year and are somewhat realistic, then this might be okay.
    • However, if this is being made to simply drive up share prices to raise capital then I see a danger zone. Selling potential investors on unrealistic and unsupported sales levels by the business model, creates a scenario that’s similar to what happened to Enron in the early 2000s.
    • On an internal basis (without public disclosure), I see less of an issue, as a business should have lofty goals and stretch itself. At least that’s what they’re doing to me in my job 😉 🙂 Publicly firms can show increasing sales for the coming year, as long as this is based on realistic expectations.

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