A Medical Device Daily
Cardinal Health (Dublin, Ohio) agreed to pay $35 million to settle charges that it engaged in a nearly four-year long fraudulent revenue and earnings management scheme, as well as other improper accounting and disclosure practices the Securities Exchange Commission (SEC) said.
Under the agreement approved by the SEC, Cardinal Health will also retain an independent consultant to review certain company policies and procedures, and be enjoined from future violations of certain provisions of the federal securities laws.
The SEC's complaint alleged that, from September 2000 through March 2004, Cardinal engaged in this conduct in order to present a false picture of its operating results to the financial community and the investing public — one that matched Cardinal's publicly disseminated earnings guidance and analysts' expectations, rather than its true economic performance. Through these practices, Cardinal materially overstated its operating revenue, earnings and growth trends in certain earnings releases and filings with the SEC.
According to the complaint, Cardinal managed its reported revenue and earnings through a variety of undisclosed and improper actions. It inflated reported operating revenue by misclassifying more than $5 billion of bulk sales as operating revenue. As detailed in the complaint, Cardinal classified its revenue from drug distribution as either "bulk" revenue, which consisted of certain full case quantities of pharmaceutical products delivered to customer warehouses, or operating revenue, which consisted of all other sales.
The complaint alleges that Cardinal implemented an undisclosed internal practice under which it reclassified any revenue from the sale of bulk product held on its premises for 24 hours or longer as operating revenue. Shortly thereafter, as the complaint describes, Cardinal began intentionally holding certain bulk shipments for longer than 24 hours, in order to shift revenue from the bulk revenue line to the operating revenue line and fraudulently inflate its operating revenue and operating revenue growth rates in certain quarters
Since the investigation began, Cardinal said in a statement that it has made a number of important changes to its financial reporting and disclosure practices, hired a new CFO, chief accounting officer and controller, and enhanced its finance staff to support the size and growth of Cardinal Health. The company also created the position of chief ethics and compliance officer, which it filled in 2005.
As previously disclosed, the company said it had reserved $35 million relating to the settlement of this matter in the quarters ended June 30, 2005 and Dec. 31, 2005.
The SEC acknowledged, and said the terms of the settlement reflected, the cooperation provided by Cardinal Health during the course of the investigation.