New York (July 27, 2004) -- Investors have filed a class-action lawsuit against Cardinal Healthcare Inc., an Ohio-based wholesale distributor of pharmaceutical products, several of its top executives, and its auditor, Ernst & Young.
In addition to Cardinal and E&Y, the lawsuit, filed on July 21 on behalf of purchasers of Cardinal securities between Oct. 24, 2000, and June 30, 2004, names as defendants Cardinal chairman and chief executive Robert D. Walter, chief operating officer George L. Fotiades and chief financial officer Richard J. Miller. The suit seeks compensatory damages and legal costs and expenses.
According to the complaint, the executives allegedly managed Cardinal's earnings through improper accounting manipulations, including improperly recording revenues from pass-through bulk sales to end users as operating revenues, so that the company's operating revenues appeared to be growing faster than they were. The complaint also alleged that Cardinal violated generally accepted accounting principles by improperly recording $22 million of expected lawsuit settlements in advance of an actual settlement agreement from litigation against a vitamin manufacturer.
On June 30, after the close of trading, Cardinal announced that the Securities and Exchange Commission had subpoenaed its records in connection with a formal inquiry into its accounting for settlement proceeds and classification of revenue; and that the U.S. Attorneys' Office for the Southern District of New York had begun its own inquiry into the same subject. Cardinal also said that its fourth quarter earnings would fall far short of analyst estimates and that it was lowering its fiscal 2004 earnings-per-share growth outlook -- all of which sent its shares plummeting more than 23 percent in one day.
E&Y took over the company's audit from Arthur Andersen in 2002. The complaint alleges that since Andersen "had an infamous recent history of failed audits, conflicts of interest and document destruction in some of the most egregious cases of accounting fraud in history … Arthur Andersen's audit of Cardinal's previous financial statements was a red flag to E&Y requiring it to apply extra scrutiny to its audit of Cardinal's financial statements, as was the criticism leveled at Cardinal in connection with its having prematurely recorded anticipated settlement proceeds and the company's practice of bulk revenue reported in total revenue."
A spokesman for Ernst & Young said that the firm had not seen the complaint and couldn't comment.
The complaint further alleges that E&Y "knew of or recklessly disregarded these red flags and thus failed to perform its professional responsibilities to properly certify Cardinal's year-end financial statements." Instead, the complaint alleges that E&Y "falsely represented" that it performed the audits of Cardinal's 2002 and 2003 financial statements in accordance with generally accepted auditing standards and issued materially false and misleading unqualified audit opinions, claiming the financial statements were prepared and presented in accordance with GAAP.
The complaint claims that E&Y "failed to maintain an independent mental attitude in matters relating to the assignment." According to the filing, E&Y received more than $4.8 million in fees from Cardinal during fiscal 2002 -- more than half of which came from non-audit fees, and more than $9.8 million in 2003, roughly 57 percent of which the compliant said was for, "among other things, due diligence services related to mergers and acquisitions and tax fees."
-- WebCPA staff
