Accounting & Tax

Cardinal to Restate Results

Revisions partly concern holding onto bulk pharmaceutical shipments for more than 24 hours. The reason? The sales of shipments could then be classi...
Stephen TaubSeptember 15, 2004

Cardinal Health Inc. will restate its results for 2001, 2002, and 2003 as well as the first three quarters of fiscal 2004. The pharmaceutical-distribution giant’s financial statements ” should no longer be relied upon,” Cardinal reported in an 8-K.

The revisions relate to three key areas: bulk deliveries to customers, cash discounts earned from suppliers in exchange for prompt payment, and balance-sheet reserve and accrual adjustments. The company reported that the restatements could change when its audit committee completes an internal review.

In October 2003, the Securities and Exchange Commission launched an informal investigation of Cardinal. The SEC’s request was related to the accounting treatment of certain recoveries from vitamin manufacturers, the company pointed out.

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In connection with the inquiry, the company’s audit committee, along with its independent counsel, began the internal review in April 2004. The review is still ongoing, according to Cardinal.

The company also pointed out that the U.S. Attorney’s office for the Southern District of New York had launched its own inquiry relating to how the company classifies revenue. “The company continues to respond to the SEC investigation and the audit committee internal review and provide all required information,” it added in its 8-K.

On May 6, the company was notified that the SEC had converted the informal inquiry into a formal investigation. Then, on June 21, as part of the SEC’s formal investigation, the company received an SEC subpoena asking for documents relating to revenue classification as either “operating revenues” or “bulk deliveries to customer warehouses,” according to Cardinal.

The company’s internal policy for distinguishing between operating revenues and bulk revenues was based on how long the product was in Cardinal’s possession before being shipped to customers. If the company possessed the product for more than 24 hours before being shipped to customers, the sale of that product was deemed to be Operating Revenues.

“Based on results of the internal review conducted by the audit committee, the company has concluded that certain bulk shipments ordered by customers were intentionally held beyond 24 hours” so that the shipments were classified as operating revenues in four quarters within fiscal 2003 and 2002, according to the filing. The effect of this practice wasn’t previously quantified and disclosed as part of the company’s reported operating revenues, Cardinal added.

Cardinal stressed that the improper classification of revenues had no impact on the company’s total revenues or reported net earnings for the periods in question.

In July, Richard Miller resigned as CFO of Cardinal Health, and the company said it would delay the release of its financial results.