Channel stuffing is when companies inflate their revenue by pushing more into distribution channels than can be sold. The retailers return much of it later, after the company has recorded it as profits (and may have gotten sweetheart deals or kickbacks.)
Two ClearOne execs convicted of channel stuffing
Prosecutors claimed that starting in 2001, Flood and Strohm falsely inflated company revenue by shipping millions of dollars in product to distributors, much of which was not even wanted.
“This was classic fraud regarding revenue recognition, old as the hills”, say Sue. It’s like a Ponzi scheme and eventually falls apart or gets uncovered in an audit.
Given the faltering economy, there will no doubt be many more attempts to report phony income.
The Journal of Accountancy details various methods used to show fraudulent profits.