To cut costs, NeoPharm, a small biopharmaceutical, has switched from a Big Four auditor to a second-tier firm, CFO.com has learned. Last week, the company ended its two-year relationship with KPMG and named BDO Seidman as its principal audit firm.
After a reorganization amid a failed clinical trial of a lead product, the company no longer felt like an ideal KPMG client, says Laurence Birch, NeoPharm’s CEO and president, who speculated that KPMG prefers clients with large market capitalizations. The company has become smaller over the past year and needed to cut back on audit costs, he told CFO.com. “We’re more of a simple company at this point,” he says.
In an 8-K filed late Friday, NeoPharm reported that there were no disagreements regarding accounting matters, disclosures, or auditing scope with KPMG during the two fiscal years ended December 31, 2006. “With BDO, we expect to get the same level of output of well-audited financial statements at a reduced price,” Birch said.
The regulatory filing acknowledges, however, that NeoPharm noted that it had a material weakness in its internal control over financial reporting noted in last year’s annual report. The company had a control deficiency concerning the review and verification of how it had estimated the fair value of non-employee stock options.
To adjust for the control deficiency, NeoPharm made changes to its unaudited financial statements for the quarter ended March 31, 2006, and later revised its procedures for how management verifies fair-value calculations for non-employee stock options.
KPMG’s audit reports on NeoPharm for the past two fiscal years did not contain an adverse opinion, the most recent regulatory filing stated. NeoPharm also noted that its 10-Q for the quarter ended March 31, 2007, reported that that the company did not have sufficient staff trained in U.S. generally accepted accounting principles and Securities and Exchange Commission regulations.
In a letter included in the 8-K, KPMG acknowledged its dismissal.
Besides the change in its principal audit firm, NeoPharm has experienced has seen several key executives leave the company over the last year, including the departures of its Birch’s predecessor, its CFO, chief medical officer, and another executive vice president. Former CFO Ronald Pauli left after seven months on the job in March. In its latest 10-Q, the company said the high turnover of its senior management team poses a risk to its business.