Case Study: Medicis Pharmaceutical Company

Analyze the primary accounting issues which form the crux of the litigation or fine for the firm, and indicate the impact to the firm as a result of litigation or fine. Provide support for your rationale.

Ernst & Young LLP agreed to pay a record $2M fine for failing to fully evaluate three annual audits (during 2005-2007) of Medicis Pharmaceutical Corp’s financial statements. The PCAOB stated that E&Y along with its partners did not properly evaluate Medicis sales returns reserve and “accepted the company 's practice of imposing the reserve for product returns based on the cost of replacing the product, instead of at gross sales price” (Rapoport, 2016, para 4).

The board stated that the auditors knew or should have known because the audit

E&Y had no internal controls in place concerning Medicis. E&Y questioned themselves several times on Medicis sales returns reserve method; however, they never fully followed through and allowed the financials to be misstated. E&Y also had created a relationship with Medicis and that 20 years would cost them fines and censures

Evaluate the primary ethical standards of the accounting organization’s leadership and values which contributed to approval of the accounting issues and thus created the litigation or fines in question. CPAs are considered professionals just like a doctor and/or a lawyer and they are required to hold to a higher standard than that of the average employee. Both public and private accountants have the responsibility to perform their duties within ethical standards and values, which have been established by the AICPA Code of Conduct. These rules or standards define the right from the wrong and ensure that every accountant’s behavior complies with perceived expectations from the

"The auditor 's job is to exercise professional skepticism in evaluating a public company 's accounting and in conducting its audit to ensure that investors receive reliable information…” (Aubin, 2016). E&Y did not do their job and the PCAOB had every right to fine the firm.

Make a recommendation as to how regulators and professional societies may prevent this type of behavior in question for the future. Provide support for your rationale

In this case, E&Y should not have been allowed to conduct Medicis audits for 20 years. There was already a conflict of interest established by their relationship years and there is no way that E&Y could have maintain its independence. A law could be put in place that limits the number of years an accounting firm can conduct audits for the same company.

Companies along with the accounting firms need to be fined. These companies are aware of the wrong doings placed on their financials and hurting them in their pocket books might deter these actions. Along with company fines, all involved should also have consequences. Again, laws have to be put in