McKesson & Robbins Fictitious Inventory Case: When the Audit Had to Reach Beyond the Books

The McKesson & Robbins fictitious inventory case involved a New York Stock Exchange-listed drug distributor whose fraud escaped its auditors for several years, according to an SEC commissioner’s historical account. The scandal prompted auditing reforms that included requirements to test inventory and receivables. If you work in inventory accounting or on an audit, did the work behind the reported assets actually happen?

This page follows the historical case’s connection to inventory testing, internal controls and independent oversight. Our broader discussion of auditors and securities fraud gatekeepers follows the workpapers, confirmations and approvals behind an audit opinion.

The McKesson & Robbins Report and Audit Reform

The SEC’s McKesson & Robbins investigative report is dated December 5, 1940. The Commission’s later Audit Committee Disclosure rule identifies it in its discussion of independent audit committees. The report remained a reference point for both the work of auditing and the people responsible for overseeing that work.

In a December 2012 speech, an SEC commissioner connected the McKesson scandal and resulting SEC report to reforms by the American Institute of Certified Public Accountants, including requirements to test inventory and receivables. The speech also recalled the Commission’s conclusion that assessing a client’s internal controls was central to examining its financial statements. Those are connected questions for someone inside accounting: what supported the balance, and how reliable was the process that produced it?

The same speech explained that unreliable financial information can cause investors to overpay for weaker securities and underpay for stronger ones, effectively making honest businesses subsidize dishonest ones. A reported asset reaches beyond the accounting department when investors use it to judge what a company is worth.

Inventory and Receivables Need Support Beyond the Ledger

Testing for fictitious inventory means reaching beyond the ledger to the goods it represents. Receivables testing asks whether the recorded customer obligations have support. For an inventory accountant today, the comparison may be between the stock shown in the books and the stock the warehouse actually holds. For a receivables employee, it may be between a recorded customer balance and the customer’s own account of what it owes.

We bring that comparison to the records behind the reported number. A count sheet, warehouse record or customer confirmation has value because of what it can establish about the asset. If you know a count never occurred or a confirmation was changed, your knowledge reaches a part of the process that the finished balance cannot explain.

Internal Controls Depend on What People Actually Did

The SEC commissioner tied how far an audit reaches to how well a company’s controls work, citing the McKesson report. A control described in a policy and a control that operated on a particular transaction are different things an insider may know about.

Consider an audit file that says a discrepancy was resolved. If you handled the underlying account and know the question remained open, the useful connection is between the original discrepancy, the request for an explanation and the later approval. We examine that sequence with you, including who received the information and what changed before the report went out.

You may know which explanation changed, which supporting record was replaced or which review was credited to someone who never performed it. Those details can connect the representation made to investors with the decisions inside the business.

Audit Committees Need Independence

The SEC’s 1999 audit committee rule traced its support for independent audit committees back to 1940 and cited the McKesson case. It explained that audit committees oversee management’s and independent auditors’ participation in financial reporting. For someone who raised an accounting concern, that makes the committee’s information and response part of the evidence.

The rule quoted an earlier SEC staff report about committees whose members had interests aligned with management. The warning was sharper than a call for another policy:

If your concern reached the committee, the complaint, meeting record and response can show whether the issue was confronted or simply disappeared from the account given to investors. In the SEC staff’s warning, we see a committee offering reassurance without oversight.

BF Borgers and Audit Work That Existed on Paper

In its May 2024 order concerning BF Borgers, the SEC alleged that the firm copied workpapers, changed dates, carried approvals forward and inserted reviewer names for work that had not been performed. The alleged deception concerned the work supposedly supporting the audit assurance.

If a file says you reviewed work you never saw, the approval and your knowledge of the engagement tell different stories. In the SEC’s allegations, changing the paperwork made unperformed work appear complete. The file got a review without the reviewer.

What Accounting Insiders Can See

Whistleblower information can expose a gap that the formal controls missed. The 2018 study The Significance of Whistleblowing as an Anti-Fraud Measure, published in the Journal of Forensic & Investigative Accounting, examined occupational-fraud survey data from the Association of Certified Fraud Examiners. Among 4,943 frauds with complete data, whistleblowers detected 35.9%, compared with 21.4% detected through internal controls.

The paper also found that whistleblower detection became more likely as more people participated in the fraud. Its discussion explains why firsthand knowledge need not mean watching every act occur:

For someone in inventory or audit work, the starting point may be the support that changed or the approval that never happened. We work with you to connect what you saw to the accounting records and the explanation investors received. Questions about your accounting or audit role and SEC whistleblower eligibility belong in that conversation with our experts.

Whistleblower Rewards for Accounting Evidence

Eligible SEC whistleblowers can share 10% to 30% of qualifying monetary sanctions collected when the covered action exceeds $1 million in sanctions. We assess how your information and role fit a securities fraud case, including what the records show about the reported assets and the audit work. Where the fraud also involves government money, a whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers.

You Know What the Audit File Leaves Out

If the inventory records or audit approvals tell a story you know is false, talk with our whistleblower experts about the difference. We build your case around the transactions and decisions you understand, and bring in securities fraud whistleblower lawyers who know accounting evidence. You bring the view from inside the business; we bring the expertise and partnership to pursue it with you.