The fallout over a $400 million fraud scheme by former ArthroCare (NSDQ:ARTC) executives continued yesterday after a national accounting board announced the suspension of the former PricewaterhouseCoopers accountant who audited ArthroCare’s books but failed to turn up the scheme.
The Public Company Accounting Oversight Board barred Randall Stone from working for a registered public accounting firm for 3 years and leveled a $50,000 fine, according to a press release. Stone, who resigned from PwC June 30, did not admit or deny the board’s findings, according to the release.
The scheme was designed to generate false revenue numbers to meet internal and external forecasts by dumping inventory, first with a distributor called DiscoCare and eventually via free shipments to end-users. ArthroCare was DiscoCare’s only client until it acquired DiscoCare in December 2007, according to prosecutors. A federal judge last week refused to overturn the convictions of former ArthroCare CEO Michael Baker and ex-CFO Michael Gluk.
The accounting board found that Stone, who ran a 2007 audit of ArthroCare, "ignored or failed to properly evaluate numerous indicators that should have alerted him to the possibility that ArthroCare was improperly recognizing revenue on its 2007 sales of medical devices to DiscoCare," according to the release.
"Such indicators included unusual pricing and payment terms, quarter-end sales spikes, and evidence that ArthroCare may have funded DiscoCare’s purchases through monthly service fee payments. Sales to DiscoCare helped ArthroCare meet its revenue forecasts for 2007," the PCAOB said. "The board also found that Stone violated PCAOB rules and standards in auditing ArthroCare’s accounting for its acquisition of DiscoCare in December 2007. Stone failed to exercise due professional care and skepticism when, among other things, he agreed with the company’s proposed accounting for the acquisition without adequately assessing whether such accounting treatment complied with generally accepted accounting principles."
"Revenue often is a key metric for public company investors and is a financial reporting area prone to manipulation by management," Claudius Modesti, director of PCAOB enforcement & investigations, said in prepared remarks. "When an auditor is confronted with multiple indicators of problematic revenue recognition, as happened here, he or she must get to the bottom of the relevant issues, including digging into management’s representations."
