Biovail Case Study
Table of Contents
Executive Summary
Biovail Corporation, a major Canadian pharmaceutical company listed on the New York Stock Exchange, announces that it will miss its quarterly earnings target by $25 to $45 million, blaming $10 to $15 million of the shortfall on a truck accident involving a shipment that left its facility on the last day of the quarter. The case was ultimately prosecuted by the U.S. Securities and Exchange Commission (SEC). The case is centered on the question of revenue recognition and how the company should have accounted for the sales (FOB shipping or FOB destination). However, it also provides a rich setting permitting exploration of peripheral topics around the ethics of earnings management. For example, the case discusses stock analysts ' reactions to the announcement; questions how much product was actually in the truck; questions how aggressively the company responds against the analysts who downgrade the stock; and highlights the role of the SEC in enforcement.
Besides that, Biovail’s stock had listed on both the Toronto and New York stock exchanges. Biovail filed annual reports to the U.S. SEC and prepared financial statements in accordance with both U.S. and Canadian generally accepted accounting principles (GAAP). On 30 September 2003, there was a truck carrying a shipment of Wellbutrin® XL from Biovail’s manufacturing facility in Manitabo to Biovail’s Distributor, North Carolina was involved in a accident near Chicago. The company announced that the loss of the quarterly earnings which target by $260 million is because of the truck accident happened.
There are several issues in this case which included accounting policy based on the revenue recognition; how Biovail Corporation should account the sales based on two different “Freight On Board” (FOB) point which are FOB Shipping point and FOB Destination point, and ethic of earning management where Biovail is suspected might significantly overestimate the
Executive Summary
Biovail Corporation, a major Canadian pharmaceutical company listed on the New York Stock Exchange, announces that it will miss its quarterly earnings target by $25 to $45 million, blaming $10 to $15 million of the shortfall on a truck accident involving a shipment that left its facility on the last day of the quarter. The case was ultimately prosecuted by the U.S. Securities and Exchange Commission (SEC). The case is centered on the question of revenue recognition and how the company should have accounted for the sales (FOB shipping or FOB destination). However, it also provides a rich setting permitting exploration of peripheral topics around the ethics of earnings management. For example, the case discusses stock analysts ' reactions to the announcement; questions how much product was actually in the truck; questions how aggressively the company responds against the analysts who downgrade the stock; and highlights the role of the SEC in enforcement.
Besides that, Biovail’s stock had listed on both the Toronto and New York stock exchanges. Biovail filed annual reports to the U.S. SEC and prepared financial statements in accordance with both U.S. and Canadian generally accepted accounting principles (GAAP). On 30 September 2003, there was a truck carrying a shipment of Wellbutrin® XL from Biovail’s manufacturing facility in Manitabo to Biovail’s Distributor, North Carolina was involved in a accident near Chicago. The company announced that the loss of the quarterly earnings which target by $260 million is because of the truck accident happened.
There are several issues in this case which included accounting policy based on the revenue recognition; how Biovail Corporation should account the sales based on two different “Freight On Board” (FOB) point which are FOB Shipping point and FOB Destination point, and ethic of earning management where Biovail is suspected might significantly overestimate the
References: Donald E. Kieso, J. J. (2011). Intermediate Accounting Volume 1. United States of America: John Wiley & Sons, Inc. Liang, J., & Tober, G. P. (2009). Identifying Accounting Problems and Adopting Practices to Detect Financial Misconduct: A Primer for Lawyers. Financial Fraud Law Report, (October), 14. Young, M. R., Farr, W., & LLP, G. (February 21 - 22, 2008 ). Audit Committee. In A Corporate Governance Guide, Third Edition (pp. 1197-1199). Washington, D.C. . COSO Defination of Internal Controls. (n.d.). Retrieved October 18, 2013, from Minnesota Management & Budget: http://www.beta.mmb.state.mn.us/coso-definitions Flashback: Accounting for Biovail 's Truck Accident (2010) :http://www.complianceweek.com/blogs/enforcement-action/flashback-accounting-for-biovails-truck-accident#.VCe4bRYkz-o SEC Charges Biovail Corporation and Senior Executives With Accounting Fraud (2008) : http://www.sec.gov/news/press/2008/2008-50.html Carton, B. (2010, September). Flashback: Accounting for Biovail 's Truck Accident. Compliance Week .