Case 7.1 – Ligand Pharmaceuticals

Posted: August 26th, 2021

Case 7.1 – Ligand Pharmaceuticals

Name

Institutional Affiliation

Case 7.1 – Ligand Pharmaceuticals

A review of the case shows that the Ligand Company acted in contravention of the U.S accounting standards and concepts. Notably, the U.S Generally Accepted Accounting Principles (GAAP) were violated when the accounting team of the company decided to understate the sales returns intentionally to depict a better picture of the company’s financial situation (PCAOB, 2007). The focus of the case study is about the Ligand’s violation of the U.S comparability, consistency, and fair representation concepts and standards (Wiecek & Young, 2010). The aim is to criticize PCAOB for being excessively stringent. Usually, financial statements are supposed to show a fair representation of the business activities of an organization. This is according to international accounting standards 18 (IAS 18), which recognizes revenue as income for the business. Hence, it should be recorded according to future economic gains of the organization as a sales return. Therefore, sales return is a fundamental accounting entry that ensures that the benefits or revenues are realizable.

            However, Ligand Company did not comply with the prescribed accounting standards and concepts, particularly IAS1 and IAS 18(Wiecek & Young, 2010). The reason is that it committed fraud by under-representing its sales returns to 2.5% of the net revenue instead of an average of 13% or 20%. On realization of this, it was the responsibility of external auditors to suggest for readjustment, which they failed. On its part, thePublic Company Accounting Oversight Board (PCAOB),as an oversight body for auditing firms, introduced stringent measures to counter such future engagements among its partners. However, this has elicited various criticisms because of its stringent measures. It has stringent auditing policies meant to prevent accounting scandals, which are incredibly cumbersome. Therefore, proposals have been made for the PCAOB to ensure the efficiency and practical application of the policies. Also, there is a need for regular interactions with partners in addressing compliance issues. However, punishing partners like in the case study could easily hamper the survival of partner auditing firms, hence relatively unfair.

References

PCAOB (2007). CASE 7.1 Ligand Pharmaceuticals: PCAOB Issues Disciplinary Orders Against Deloitte & Touche LLP and a Former Audit Partner. Washington, D.C., Dec. 10, 2007: Public Company Accounting Oversight Board.

Wiecek, I. & Young, N. (2010). IFRS primer: international GAAP basics. Hoboken, NJ: John Wiley & Sons.