Bausch & Lomb, Inc (A)

Issue Raised in the Case

Bausch & Lomb was one of the longest established companies in the
US. It was proud of a heritage that began as early as 1853, when John
Bausch, a German immigrant, set up an optical goods shop in Rochester,
NY a city that remains the headquarters of the modern company.
From the early 1980s, new CEO Gill at Bausch & Lomb began to turn
the technical expertise into fast business growth. This growth was
substantially led by contact lens and lens care products, and by
international sales of key brands such as the classic Ray-Ban sunglasses.
But these star performers also lay at the heart of the companys
developing problems in the early 1990s
The contact lens divisions sales were dominated by a type of soft
contact lens known as SVS, designed to be worn for around six months.
However, since the mid 1980s, this kind of contact lens had been
inexorably losing market share to disposable contact lenses. Bausch &
Lomb had entered the market for disposable lenses late because it had
not wanted to cannibalise existing product lines. As a result, the contact
lens division found itself playing catch-up in this developing market sector
with some powerful rivals, notably Johnson & Johnson
Bausch & Lomb has some major internal issues it must first address.
(a)

The first major issue is that Gill has imposed a numbers oriented,
work environment that has led to managers across all divisions to
work and ensure the agreed numbers are met. There was
tremendous pressure on all departments through the company to
achieve double digit increases in revenues each year, which led to

unscrupulous accounting practices by upper level management.

(b)Second, the manner in which Bausch & Lomb implemented its
promotional programs led the company to see tremendous growth in
its sales figures at the turn of the year through channel stuffing. The
September and December promotion programs along with the
generous credit terms offered enticed distributors to take on excess

inventory that had no chance of being sold in order to boost Bausch

and Lombs year-end figures.
(c) Third, the LAMEX and Hong Kong Division scandal had changed and
damaged the reputation of Bausch & Lomb. Bausch & Lomb had
falsely accounted for revenues and sales for,and the press coverage
that followed was negative especially after the Hong Kong Division
scandal.
(d)Fourth, management failed on all parts to audit the integrity of all
data being reported back to them. The increased figures during the
turn of the year should have been a major alarm bell for
management to try and spread the sales throughout the year
instead of having hikes, especially as the product is not seen to be
seasonal or have seasonal fluctuations. Consequently, by the time
that senior management began to realize these indescrepencies, the
problems had already been exasperated through the media.
Externally, Bausch & Lomb was seen to be a very financially
attractive company to investors, however the investment community has
begun to criticize its internal practices and current shareholders are
beginning to question the CEOs tactics and practices. Secondly, the
scandals that confronted Bausch & Lomb have led the media to pursue
persistent attacks on the manner in which Bausch & Lomb conducted its
business activities.
Role you have perceived( eg. CEO, Accountant, Financial manager
Etc.)
CEO
The Financial Accounting Standards Board (FASB) criteria for
recognizing revenues were completely satisfied with B&Ls new sales
strategy under the accrual accounting practices. The company can
recognize revenues from the sale of good either under cash accounting
that is when the actual cash is received against the inventory being sold
or under the accrual accounting to reflect the firms revenue performance
when revenues are earned or cash is likely to be collected.

In the case of B&L, the company actually delivered the goods to the
distributors. According to the new strategy, the needs of high
volume customers had to be satisfied by the distributor channel
instead of selling them directly. Thus, the distributors had to
absorb the increased level of inventories so that they can satisfy
the needs of the high volume customers. The credit terms were
increased but the likelihood of the payment from these
distributors was not uncertain and the company did not
anticipate that the probability of default would increase because
of the implementation of this strategy.
Thus, all the steps taken by B&L were in compliance with FASBs
generally accepted accounting principles (GAAP). B&L also devised
particular strategies to encourage the distributors to market the product
and reach the high volume customers. There were many benefits and
financial rewards for the distributors that could potentially increase the
sales level of the company.
The companys credit terms were loosened over a six month period
in order to boost the sales of the distributors. The companys marketing
steps were questioned as an accounting fraud. It is because the company
pushed the distributors to absorb a larger number of units and this was
before the closure of the accounting year. This raised a question that the
company might have performed this act deliberately to show an increase
of 13% in the net revenue of that period. The sales that had to be covered
in the next year were recorded in the current period. This would
significantly affect the next terms revenue and income because the
goods that are to be sold in that period have already been produced and
pushed out in the market.
The default by the distributors was because of two main factors, one
being the decreased demand of this particular product type and the other
being rejection of this distribution method by the large volume customers.
The intent of company, as evident from the marketing plans of the

companys management, was to divert their marketing efforts to the sales

of disposable market from conventional lens market which was a preestablished product of the company. Whatever the case may be, this
strategy was not against the FASBs criteria for recording the revenues, as
confirmed by the audit opinion for B&Ls 1993 financial statements.

What is your decision?

(a)
(b)

Being in external auditors.

Whatever the motivation, the perpetrators had created a

complex chain of paperwork to sustain their actions. The SEC

investigation found that Asia-Pacific personnel prepared false
paperwork reflecting non-existent transactions, including customer
requests for exchange, warehouse receipts and credit notes.
Stern action is initiated against them.

How it be implemented?
Star performers whether people or divisions require careful inspection and controls.
Senior corporate executives who exhort subordinates to reach targets must make sure that
the reported figures are real.
Aggressive sales drives and accounting practices can, for a while, mask strategic business
weaknesses.
Companies should watch out for a growth in receivables and credit lines, which can be
used to inflate reported earnings that might never turn into cash flow.

Implications

How will you sort out the Implications.