Channel Stuffing Rears Its Ugly Head

Because little or no money ever changes hands, the Securities and Exchange Commission (SEC) and various accounting governing bodies seriously frown on these antics, preferring that a sale not be booked on a "sales-in" basis, but when money changes hands and goods move to a third party on a "sell-through" or "sales-out" basis.

Still, channel stuffing continues. Recently, several companies have wrestled with it, including Clear One Communications and Symbol Technologies. Network Associates, meanwhile, continues to wrestle with past channel-stuffing problems. In late March, the company postponed filing its 2002 Form 10-K, due on March 31, so it could restate prior financial results for fiscal 2000, 1999 and 1998. The problem: past sales to distributors. Since 2001, the company has counted sales toward revenue on a sell-through basis, instead of a sales-in basis. But prior to that, things were not so clear-cut.

For its part, Clear One Communications has changed the way it recognizes revenue and engages distributors. Its former CEO, Frances Flood, a former VARBusiness Visionary, has seen her role significantly reduced due to the SEC investigation into the company's sales practices. The SEC had sought to obtain a preliminary injunction against Clear One, although a U.S. District Court in Utah refused the request.

However, the court did find some evidence of the SEC's claims, which revolve around shipments of Clear One videoconferencing equipment to various distributors. In a February press release, Clear One denied all allegations and later insisted that it "made significant changes to its distribution model, revisions in product forecasting methods, and transitioned to 60-day payment terms, with no exceptions, for all distributors." It did so before the SEC began to investigate.

Another case of channel stuffing involved Symbol Technologies. Since it surfaced, however, the company has rallied. In late March, Robert Asti, a former Symbol vice president of sales, conceded in a federal court that he was behind a scheme to inflate Symbol's revenue by stuffing the channel. According to Asti, he persuaded third parties to buy scanners and readers that they did not need. He promised that Symbol would buy back the equipment later.

Alas, like most channel-stuffing plots, the scheme unraveled, leaving a messy pile to clean up. But the company quickly stepped up to the task. For example, Robert Korkuc, vice president and chief accounting officer, resigned, effective March 11. Asti, of course, faces fines and possible jail time for his misdeeds. As for Symbol, it still must complete a restatement of past fiscal results covering 1999 to 2002.

When the scandal broke, shares of Symbol stock plunged to around $5 each from around $8.50 each. They have since recovered. Sales, meanwhile, have also recovered. They're likely to be up year-over-year in the first quarter, for example.

Ironically, channel stuffing continues, even though the SEC has strict rules, known as the Stewart Parness criteria, that must be adhered to. They revolve around who requests that a transaction be on a bill-and-hold basis. (It must be the buyer, not the seller, for example.) No matter, channel stuffing is almost universally bad and almost always winds up disgracing the company that practices it. In past years, that has included Apple, Compaq, Novell and Palm. The list also includes those outside high-tech, of course. Rumors of channel stuffing have circulated around heavy equipment maker John Deere, for example. Channel stuffing has also cost many talented individuals their careers and reputations.

So, why does it continue? Simple: So long as there is pressure to meet short-term expectations, there always will be a temptation to resort to dubious means to meet a quota. Unfortunately, such efforts often have dramatic, long-term consequences. Just ask Robert Asti.

T.C. Doyle is senior executive editor at VARBusiness. You can reach him at [email protected].