Insight

Channel stuffing creating risks of sales inflation

Investigations Insider

Dana G. McFerran

Dana G. McFerran

Partner, Advisory, Forensic, KPMG LLP

+1 212-954-3724

Demand drop leads to channel stuffing, creating risks of sales inflation

Recent changes in the Administration have led to an increase in Department of Justice (DOJ) focus in the life sciences industry.

During the pandemic, companies saw a drop in demand for various products across their portfolios i.e. consumer, med device, and some pharmaceutical product lines. As a result, we are seeing increased pressure on companies to get their products to market quickly which has led to a rise in “channel stuffing activities - a business practice used by a company to intentionally and prematurely push product and inflate its sales and earnings figures via its distribution channel. Channel stuffing is typically done immediately prior to a company’s financial reporting period. In addition, product diversion has become more prevalent in the Asia Pacific region. Product Diversion is the unlawful distribution of regulated pharmaceutical/medical device products from a legal source to an unauthorized marketplace or “channel.”

Life Sciences companies and their legal counsel use forensic accountants to analyze transactions and accounting treatments, looking at the “sales in” data to the distributor and “sales out” data from the distributor to the ultimate buyer, and also examining the records of their distributors to identify anomalies that could be indicators of these inappropriate activities. Companies, Outside Counsel, and Forensic Accountants need to work together to combat these issues and put preventative and detective measures in place. We use the data to inform legal strategy and help shape the defense of our clients. These are just a few areas for Life Sciences companies and their counsel to consider.

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Fraud allegations require a swift response and skilled resources. When fraud occurs in a global setting, it is essential to perform a thorough investigation.