Bristol-Myers produces and distributes medicines and health care products. In 2002, the company experienced one of its worst years in its 100-year history. Three of its top- selling drugs lost patent protection, and sales dramatically declined due to their generic substitutes produced by other companies. The share price of Bristol-Myers stock declined by nearly two-thirds, from about $75 in September 1999 to $25 in September 2002.
In April 2002, the company disclosed that it had used sales incentives to encour-age wholesalers to buy more drugs and health care products than necessary. In July 2002, Bristol-Myers was notified that the SEC was opening a formal inquiry to determine whether the company had inflated revenue by as much as $1 billion in 2001 through the use of sales incentives. 8 The company restated its earnings to remove the amount of excessive sales.
a. Evaluate Bristol-Myers Squibb’s revenue recognition policy. Why did the SEC object to it?
b. If you had been Bristol-Myers Squibb’s auditor, what questions would you have asked the client about the sales incentives? How would you modify the audit risk model to account for them?
c. Identify an internal control procedure that could have prevented the revenue misstatement that occurred.