Symbol Technologies, Inc., was a fast-growing maker of bar-code scanners. According to the federal charges, Tomo Razmilovic, the CEO at Symbol, was obsessed with meeting the stock market’s expectation for continued growth. His executive team responded by improperly recording revenue and allowances for returns, as well as a variety of other tricks, to overstate revenues by $230 million and pretax earnings by $530 million. What makes this fraud nearly unique is that virtually the whole senior management team was charged with participating in the six-year fraud. In April 2015, the SEC settled with the last of the 13 Symbol executives that were defendants in the case. Razmilovic, the former CEO, fled the country to avoid prosecution and was still at large at the time of the final settlement. The exact nature of the fraud is described in the following excerpts from the SEC civil complaint. Concerning sales of goods, the complaint alleged that “Defendant Borghese, Symbol’s former head of sales, spearheaded the revenue recognition fraud. Whenever actual sales fell short of Razmilovic’s target, Borghese stuffed the distribution channel by granting resellers return rights and contingent payment terms in side agreements that he negotiated or authorized. . . . In addition, Borghese employed multiple schemes for claiming revenue before it was earned, such as shipping the wrong product when the product ordered by the customer was unavailable. . . . In a related scheme that Burke originated, Mortenson and Donlon also caused revenue to be recognized in several quarters on shipments that did not occur until the next quarter. To conceal this premature recognition of revenue, Mortenson and Donlon, acting at the direction of Borghese and others, secured backdated phony ‘bill and hold’ letters from the customers.” Concerning sales of service, the complaint alleged that “Defendant Heuschneider, finance director for Symbol’s customer service division, artificially inflated the service revenue reported by Symbol . . . by directing subordinates to make multimillion dollar fraudulent entries that improperly accelerated revenue recognition on existing service contracts. Heuschneider also fabricated revenue by improperly ‘renewing’ dormant or cancelled service contracts without the customer’s approval.”

Required:

1. What facts, if any, presented in the complaint suggest that Symbol violated the revenue recognition principle?

2. Assuming that Symbol did recognize revenue when goods were shipped, how could it have properly accounted for the fact that customers had a right to cancel the contracts (make an analogy with accounting for bad debts)?

3. What do you think may have motivated management to falsify the statements? Why was management concerned with reporting continued growth in net income?

4. Explain who was hurt by management’s unethical conduct.

5. Assume that you are the auditor for other firms. After reading about the fraud, what types of transactions would you pay special attention to in the audit of your clients in this industry? What ratio might provide warnings about possible channel stuffing?