How much will pharmaceutical drug returns cost you? In the case of Ernst & Young, $2 million and perhaps your career.
The auditing firm agreed to pay $2 million to settle allegations by the government's auditing regulator that Ernst & Young was not rigorous enough in accounting of reserves for returns for Medicis Pharmaceutical ($MRX). It is the largest fine every imposed by the Public Company Accounting Oversight Board.
The regulator also sanctioned four current or former partners of the Big Four accounting firm. Two were barred from the industry. Neither the partners nor the company had to acknowledge wrongdoing.
The board said from 2005 through 2007, the partners accepted Medicis' practice of setting aside reserves for returns based on the cost of replacing the product, instead of the gross price. The board said Ernst & Young, which had been the company's auditor for 20 years, found that Medicis' practice didn't conform to GAAP, but chose to look the other way.
The cost of product returns, particularly in the event of recall, can be substantial.
Medicis later changed the policy and restated earnings. Both Medicis and Ernst & Young said in statements that they cooperated with the board's investigation.