Litigation,Censures, and Fines
Litigation,Censures, and Fines
1.Primary accounting issues which form the crux of the litigation orfine for the firm and impacts to the firm as a result of litigationor fine.
ThePublic Company Accounting Oversight Board (PCAOB) settled adisciplinary case against Ernst and Young Company. Ernst and Youngwas accused of failures connection to audits that it conductedbetween 2005 and 2007 in Medicis Pharmaceutical Corporation (Brazel,Carpenter, & Jenkins, 2013). Ernst and Young failed to do athorough evaluation of the amount of money that was set aside byMedicis Pharmaceutical Corporation in order to facilitate the cost ofproduct returns in audits from the last ten years. MedicsPharmaceutical Corporation is responsible for making skin conditions’drugs and it had hired Ernst and Young as an external audit. Ernstand Young failed to exercise professionalism skepticism in itsevaluation of Medicis’ accounting and in conducting its audit,which is necessary in ensuring that investors get reliableinformation at all times. As a result, PCAOB imposed a 2 milliondollars civil money penalty against the firm as well as sanctionedfour of its partners for violating rules and standards that are welloutlined by the board. Brazel et al (2013) note that JeffreyS.Anderson, Ernst and Young partner, was also barred from associatinghimself with any accounting firm registered under PCAOB and wasrequired to pay 50,000 dollars civil money penalty that was leviedagainst him however, he was given the right to petition to removethe bar after two years. This is because Anderson was the leadpartner for the audits that took place on 31 December 2005 and 2007he also took place in the consultation and quality reviews of theaudits. According to…this was the largest fine that to have everbeen levied by the board in its history.
2. Keyinferences of corporate ethics related to internal controls andaccounting principles which lead to the litigation or fine for theErnst and Young firm.
Ernstand Youngfailed to evaluate a material part of Medicis’ statements that itreserves for sales in a proper way. As a result, Medicis estimatedreturns and focused mostly on the cost of replacing products insteadof concentrating on the gross sales price (Ronen, 2012). This was anunethical since Ernst and Young knew very well that such method ofreserving was not supported by audit evidence. Again, Ernst and Youngfound that Medicis reserve method conflicted with Generally AcceptedAccounting Principles when doing an internal quality review of the2005 audit however, it went ahead and accepted another flawedaccounting rationale for justifying the reserve method.Evaluatethe primary ethical standards of the Ernst and Young organization’sleadership and values which contributed to approval of the accountingissues and thus created fines
Eachand every single member of Ernst and Young is responsible andaccountable for his or her decisions as well as to all EY colleaguesacross the globe. Everybody is required to comply with this standardof ethic in order to send a clear message to those they work withabout the strength of their commitment to ethical behavior andquality (Troberg, 2011). It is ethical standards outline that anydeviations from or violations of the Global Code of Conduct areunacceptable. It is also committed to delivering quality servicesthat are a clear reflection of its professional capabilities andwhich are appropriate to the clients’ specific needs and issues. Italso uphold the professional rules and standards that are applicableto it members firms, which work with regulators who oversee itsprofessional conduct with an aim of ensuring that the rules andstandards meet needs of the market that experience a continuouschange. It also employs professional skepticism and rejectsinappropriate pressure from clients and others. In connection tothis, Ernst and Young acted against its ethical standards when itfailed to carry out proper audit at Medicis PharmaceuticalCorporation hence, it was forced to pay a fine of 2 million U.Sdollars.Specificconduct violations committed by Ernst and Young in auditing MedicisPharmaceutical Corporation
Itviolatedstandardsand rules by failing to comply with these rules in evaluatingMedicis’ practice of reserving its returns during the audit periodsas well as by accepting Medicis’ decision to reserve at replacementcost (Lawprof, 2012).
Itfailed to evaluate a material component of Medicis PharmaceuticalCorporation’s financial statements (the company’s sales returnsreserve)
Ernstand Personnel, who were not associated with the audit quality reviewof 31 December 2005, indented some conflicts in the rationale with E& Y’s internal accounting guidance and GAAP. However, thepersonnel wrongly settled for an internal consultation rather thanappropriately addressing this material departure (Ronen, 2012).
Italso failed to audit the assumptions hence, placing undue relianceon representation of the management that assumed that the assumptionswere responsible.
Anargument supporting the actions against the organization andaccounting firm, based on the current professional code of conductfor independent auditors and management accountants.
PCAOB’sactionsagainst Ernst and young were justifiable since the company failed toact in accordance to the professional conduct of independent auditorsand management accounts when it failed to do its auditing process ina proper manner.Recommendationas to how regulators and professional societies may prevent this typeof behavior in question for the futureExternalauditors should request for more documents and details on everythingincluding management reviews and pension assets with an aim ofavoiding deficiencies in audits of internal controls (Troberg, 2011).Again, some changes should be made to the standard form of auditreport in order to pave way for discussion of critical audit matters.This, in turn, will help investors get a full overview of a company’strue condition.
Brazel,E.J Carpenter, D.T, & Jenkins, G. (2013. Auditors`Use of Brainstorming in the Consideration of Fraud: Reports from theField. TheAccounting Review,85(4), 1273-1301.
Lawprof,S. (2012). Ernst & Young Settles PCAOB Disciplinary Order forAudit Failures. TheAccounting Review,2, 12-43.
Ronen,J. (2012). CorporateAudits and How to Fix Them. TheJournal of Economic Perspectives,24 (2) 189-210.
Troberg,P. (2011). InternationalGAAP 2007.TheAccounting Review,83 (1), 254-257.