Enforcing Financial Reporting Standards: The Case of White ...

situation, they had to evaluate if all criteria of development costs were fulfilled. He, again,
negated that White could already expect future economic benefits as White still did not have
an approval by either FDA or EMA. Therefore, he pushed for an expense charge of the lump-
sum payment. As the auditors could not provide an unequivocal interpretation that asserted
the contrary and as they had specifically asked for managerial judgment, they eventually
decided to follow Mr. Muller’s reasoning and approved the expense charges.
The Examination
Although the transdermal patch turned out to be a huge success and the executive
teams of both White Pharmaceuticals AG and Neurocentral, Inc. were eager to extend the
alliance, they could not agree on a follow-up project and the collaboration was terminated.
Consequently, Peter slowly forgot about his struggle of how to treat the payments to
Neurocentral, Inc. Thus, in the summer of 2008, Peter was not in the least worried when
White Pharmaceuticals AG received a letter by the Financial Reporting Enforcement Panel.
In their letter, the FREP told White Pharmaceuticals AG that the company was chosen at
random to be inspected by the new supervising authority. They would like to examine
White’s financial statements for the year 2006. Mr. Muller did not really know what was
coming at them but he put Peter in charge of the FREP investigation as “this is an accounting
thing and it’s clearly your job to handle this”. As a first task, Peter was to provide the FREP
with White’s annual as well as quarterly financial statements including auditor’s report and
their summary of unadjusted audit differences. When two months passed without an
additional notification by FREP, Peter started wondering what the examination would bring
about. A little while later, White received another letter from the enforcement institution that
indicated areas that the FREP would put an emphasis on in their examination. At the same
time, they requested a number of documents to be sent back to the FREP within the next two
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