Uma V. Sridharan, Linda U. Hadley

Abstract: This paper analyzes the audit failure and events leading up to the financial restatements at Valeant Pharmaceuticals. Valeant, a pharmaceutical firm headquartered in Laval, Quebec, trades on both the New York (NYSE) and Montreal Stock Exchanges under the ticker symbol VRX. Valeant was a high flying stock that rose about 1000% in a short span of five years. The firm grew primarily through acquisition, having acquired nearly 100 companies, including Bausch and Lomb — a leading manufacturer of contact lenses. In October 2015, shortly before the firm’s third quarterly earnings announcement, Southern Investigative Research Foundation (SIRF) published an article about a federal lawsuit filed by R&O Pharmacy in California highlighting accounting irregularities. This paper examines the events leading up to the accounting irregularities and the internal control and audit failures at the firm. Valeant is currently under SEC investigation.

Key words: COSO; revenue recognition; auditor responsibility; tone at the top; internal control