I found an article from a financial periodical called _____ regarding a company’s accounting firm being penalized for violating auditing rules of a company’s revenue recognition practices. I will be referencing and discussing the restatement of the company, the accounting principles involved, the effect of the errors and changes on financial statements, and the affect on the stockholders.
The PCAOB (Public Company Accounting Oversight Board) has penalized Ernst & Young $2 million for violating audit firm PCAOB’s rules. Ernst & Young (audit firm) failed to properly evaluate how Medicis Pharmaceutical Corp. (company) was calculating its reserve for sales returns. Financial Restatement Summary
Medicis Pharmaceutical Corp. had to restate more than three years worth of financial statements in 2008 (Censuring E&Y, PCAOB Hits Firm's Lack of Skepticism). According to an inspection by PCAOB of Ernst & Young (audit firm) they found that there was an inaccurate interpretation of FAS 48, "Revenue Recognition When Right of Return Exists." Medicis was using an exemption to that rule for expired or soon-to-expire products that customers had returned to its distributor, but it did not apply to resellers or distributors (in this case) since the returned products were not sellable. This exemption can only be used if the product being exchanged is of the same kind and quality, the company was not supposed to consider the two products (soon to expire & customer returns) the same for calculating this reserve.
The article also stated that Medicis was reserving for most of its estimated product returns at the cost of replacing the product rather than at the gross sales price of the product, which also caused a material effect on Medicis’s revenue calculations. Medicis’s practice was considered a "flawed accounting rationale," according to the PCAOB, which conflicted with GAAP and Ernst & Young’s company policies, yet it was not evaluated...