Allen Software was a relatively new tech company led by aggressive founder Benjamin Allen. His strategy relied not so much on producing new products as using new equity capital to buy up other software companies. To keep attracting investors, Allen 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, shipments that 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

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

2. In what way would those investors have been harmed?

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