Reference no: EM132574992

Sherrie Software was a relatively new tech company. To keep attracting investors, Hawk, the President had to show year-to-year revenue growth. When his normal revenue streams stalled, he resorted to the tried-and-true "channel stuffing" technique. First, he improperly recorded shipments to his distributors as sales revenue; these shipments far exceeded the market demand for his products. Then he offered the distributors large payments to hold the excess inventory instead of returning it for a refund. Those payments were disguised as sales promotion expenses. He was able to show a considerable growth in revenues for two years running until one savvy investor group started asking questions. That led to a complaint filed with the SEC. The company is now in bankruptcy, and several criminal cases are pending.

Requirements

Question 1: What factor may have tipped off the investor group that something was wrong?

Question 2: In what way would those investors have been harmed?

Question 3: If Allen had attracted enough equity capital, do you think he would have been able to conceal the scheme?