Editorial
Bill-and-hold
What follows is my understanding, based on some preliminary research, of the practice of bill-and-hold, which is being debated on the Cranberry Stressline Forum.
Bill-and-hold is a common way that customers order products from manufacturers. It is generally not illegal or unethical. In fact, you may have done this yourself. A good example for a cranberry farmer is when you order chemicals in advance of when you need them and ask the retailer to hold them until a given date. Large companies may order in advance and ask the manufacturer to withhold delivery because they don't have the warehouse space available and sales aren't anticipated for a certain period of time.
However, bill-and-hold may also be used to inflate earnings reporting. The most notorious case in recent years has been Sunbeam. The company was engaged in their own "turn-around plan." The utilized both bill-and-hold, and channel stuffing, which is a method of accelerating sales from later periods into earlier periods. The law firm of Foley Lardner notes that these schemes "create the illusion of successful restructuring." (Reference) The following is a succinct description of the creative accounting at Sunbeam:
Part of the turnaround in Sunbeam’s stock price and profits, temporary as it turned out since Sunbeam declared bankruptcy in 2001, involved some creative accounting that its auditors, Arthur Andersen, did nothing to stop and may have encouraged. The heart of Sunbeam’s approach to boosting its stock price was a “bill and hold” strategy with its retail buyers. It worked like this: Sunbeam sold its products, at large discounts, to retailers before they would have purchased their inventory in the normal course of business. The purchased inventory then was held at warehouses owned and run by third parties until it was actually delivered to the retailer later. Such a strategy results in accelerating current sales, at the expense of future sales, to retailers who would not have purchased the inventory except for drastic discounts they had been offered and who, at the time of purchase, had no need of the inventory. When the season for those sales came around, there would be none unless the Company could scare up some new customers. It was a classic case of “borrowing” revenue and profit from future periods. From AccountantsWorld.com
According to an article in Leasecoach.com, one of the reasons for resorting to these accounting methods is that Executive compensation is tied to company performance:
That means that leaders are encouraged to boost revenues and cut costs. Cutting costs is easy. They just lay off or fire people. Boosting revenues is another story. Since they have the power, they can create whatever vehicles are necessary to carry out their mission.
The jargon of revenue manipulation - side-letters, channel-stuffing, and round-tripping - almost makes faking sales figures sound fun - until the malpractice is discovered. People are optimistic that the collapse of Enron will usher in a new climate of accountability and transparency.
The article goes on to say that executives are encouraged to commit fraud:
Revenue fraud has a long and murky history. Lynn Turner, former chief accountant at the SEC and now an accounting professor at Colorado State University, points out that "the notion of a 375-day fiscal year" is almost as old as the concept of a sales target.
"Bill-and-hold" fraud - under which companies bill customers before they need the goods and then keep them in stock, having booked the revenue in advance - has been around for at least two decades.
Regulators say that in the past five years, the pressure to resort to fraud when normal business and accounting practices fail has risen for three main reasons, all of them linked: new measures of corporate growth; demanding internal and external targets; and excessive executive pay.
Former SEC Chairman Arthur Levitt referred to bill-and-hold as "hocus pocus accounting." He said "companies try to boost revenue by manipulating the recognition of revenue. Think about a bottle of wine. You wouldn't pop the cork on that bottle before it was ready. But some companies are doing this with their revenue - recognizing it before a sale is complete, before the product is delivered to a customer, or at a time when the customer still has options to terminate, void, or delay the sale." In an article on SmartPros.com, Dana Petri described hocus-pocus accounting as: "the practice of some companies improperly boosting reported earnings by manipulating the recognition of revenue. Among the most common methods of doing this are the bill-and-hold transaction and a long list of sham transactions involving shipping, billing, and/or related-party involvement." Petri went on to write: Because many companies are under extreme pressure to report quarterly earnings that meet or exceed investors' expectations, fraudulent practices, such as the overstatement of quarterly revenue, can result.
John L. Mariotti, of The Enterprise Group, writes about companies mortgaging their future: "companies know there are market fluctuations in their industries and do crazy things to pump up quarterly earnings. They do things like pulling ahead orders, mortgaging the future (does Lucent come to mind), giving deals on prices, financing, dating, or making 'bill and hold' sales to reach the quarter's goals."
Whether Ocean spray is engaging in these practices, for these reason, remains to be seen. If they are, the futures they are mortgaging belong to their own grower/owners.
More about Bill-and-hold at Sunbeam, from ebusiness Ethics
Accounting
Fraud: Learning from the Wrongs
By Paul Sweeney from Financial Executive