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PCAOB Action Illuminates Returns Accounting

Tammy Whitehouse | February 28, 2012

A recent disciplinary action against Ernst & Young provides a review lesson for corporate accounting executives and auditors alike on how not to push accounting logic to improve reported financial results.

The Public Company Accounting Oversight Board imposed its biggest enforcement action ever on Feb. 8 against Ernst & Young and four of its audit partners, alleging they failed to reject aggressive accounting at Medicis Pharmaceutical Corp. The board fined Ernst & Young $2 million and handed out various penalties to the four auditors for allowing Medicis to bend accounting rules related to product returns in a way that inflated revenue—even after E&Y determined internally that the accounting may not be supported by the facts. Medicis ultimately restated more than three years' worth of financial statements to correct the problem.

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