Inventory Growth Exceeding Revenue Growth
Raw materials, WIP, or finished goods inventory surges while sales growth slows or declines, indicating obsolete, phantom, or unsalable inventory.
RED FLAG PROFILE & FORMULA
- Indicator: Inventory Growth Exceeding Revenue Growth
- Screening Formula:
Inventory Growth Rate - Sales Growth Rate > 15% - Targeted Schemes: phantom inventory, channel stuffing, bill and hold.
- False Positive Context: Legitimate inventory build-ups happen prior to major new product launches (such as new smartphone models or automotive line rollouts) or when companies deliberately accumulate buffer stock against expected tariff increases.
MATHEMATICAL FORMULA & EXTRACTION METHOD
10-K COMPUTATION
Mathematical Formula
Inventory Growth Rate - Sales Growth Rate > 15%
How to Compute from Form 10-K
Calculate year-over-year percentage change in total inventory and compare to year-over-year percentage change in total net revenue.
False-Positive Boundaries & Legitimate Explanations
Legitimate inventory build-ups happen prior to major new product launches (such as new smartphone models or automotive line rollouts) or when companies deliberately accumulate buffer stock against expected tariff increases.
FRAUD SCHEMES DETECTED BY THIS INDICATOR
SCHEME CORRELATIONS PHANTOM INVENTORY Click to view journal entries and debits/credits for this scheme. CHANNEL STUFFING Click to view journal entries and debits/credits for this scheme. BILL AND HOLD Click to view journal entries and debits/credits for this scheme.
CASES WHERE THIS RED FLAG APPEARED BEFORE DISCOVERY
3 HISTORICAL CASES| Case Title | Jurisdiction | Primary Scheme | Action Date |
|---|---|---|---|
| Sino-Forest Corporation: Fictitious Timberland Holdings and Valuation Fraud | CA | reverse merger fraud | 2013-09-20 |
| Sunbeam Corporation: 'Chainsaw Al' Dunlap's Big Bath and Bill-and-Hold | US | big bath | 2000-09-20 |
| Crazy Eddie: Altered Inventory Count Sheets and Phony Invoices | US | phantom inventory | 1988-09-20 |