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

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Concerning the second part of the question, White Pharmaceuticals AG should indeed have been more open about the examination. White’s CFO, Alexander Muller, should have assigned a team to the examination and not dismissed the whole issue. Instead, he should have given the team top priority in working on this issue. It is part of his job as CFO to inform both CEO and the board about the examination as well as to be in close contact with FREP’s auditors concerning the investigation. In addition, White should have communicated openly with investors from the start. The lack in communication might signal to investors that White has something to hide and that they do not believe in their accounting systems. Investors may also wonder if the investigation was a result of a random sampling by the FREP or if there were indications for errors and the FREP reacted to these. Being silent about the examination may therefore increase the damage to White Pharmaceuticals’ reputation. (3) Students often do not seem to realize whose responsibility the conformity of financial statements to IFRS is. With this question, we intend to resolve that issue and also discuss the role of auditors in the context of the case study. As our case is constructed to introduce students to the concept of managerial judgment, we refrain from calling the error finding a serious misapplication of IFRS. However, some instructors may feel that the error finding is more severe and that the auditors should have known better. They may want to discuss possible sanctions that institutions like the German Wirtschaftsprüferkammer (WPK) or the American Public Company Accounting Oversight Board (PCAOB) could impose on White’s auditors. First of all, it should be noted that a company’s management is responsible for the preparation of the financial statements. Therefore, it is also their responsibility to ensure that appropriate measures are taken to prevent accounting errors or fraud. Auditors, on the other hand, only express an opinion on companies’ financial statements. They are obliged to 39
conduct their audit in a way that misstatements which materially affect a company’s financial statements are discovered with reasonable assurance. Although auditors examine financial statements, they do not provide a full audit or guarantee that the statements are flawless. Auditors are also not assumed to discover fraud. Thus, the responsibility for the expense charge of the lump-sum payment lies with White’s management. However, as White discussed the transaction with their auditors and as the auditors confirmed the accounting for the payment, White’s position towards the FREP may be stronger and they may consider opposing the error finding. On the other hand, White could also argue that the auditors did a poor job in their assessment and consider a change of auditors. This could also be a signal to investors that White takes precautions to prevent future accounting mistakes. (4) Alex Muller’s motivation to appeal the FREP’s error finding would be that he is convinced about his assessment of the transaction. He may see the transaction as controversial enough to expect a revision of the finding by BaFin. In addition, he may regard an appeal as a chance to avoid the negative publicity associated with the publication of the finding. As we have laid out above, research has shown that the consequences of a restatement are quite severe. Alex Muller may want to grasp the slightest chance to avoid this outcome. What might also play a role is that he confirmed the accounting treatment himself. If White’s CEO or shareholders want to see a reaction to the error finding, Mr. Muller’s job may be at stake as well. In his answer, Peter would have to raise valid points to challenge FREP’s finding. The key issue of the response would revolve around whether or not the transaction was an acquisition. Peter could argue that White acquired all rights to the research performed with the upfront payment. However, as White did not acquire something that satisfied the 40
Page 1 and 2: Enforcing Financial Reporting Stand
Page 3 and 4: Enforcing Financial Reporting Stand
Page 5 and 6: same time, he made his intention qu
Page 7 and 8: Accounting for the Agreement Soon a
Page 9 and 10: capitalization of the payment with
Page 11 and 12: The Discussion with White’s Audit
Page 13 and 14: weeks. The short time frame surpris
Page 15 and 16: (3) Assess the payments made by Whi
Page 17 and 18: (5) Now, imagine that White’s CFO
Page 19 and 20: Case Synopsis TEACHING NOTES Our st
Page 21 and 22: (3) Who is to take responsibility f
Page 23 and 24: Exceptions to this rule are most no
Page 25 and 26: In addition, the transaction may ha
Page 27 and 28: had filed for it and it seems like
Page 29 and 30: eversed as students sometimes imagi
Page 31 and 32: predictive role of accounting infor
Page 33 and 34: (2) The impact of an adoption of IF
Page 35 and 36: considered part of the matching pri
Page 37 and 38: selected by one of three ways: Eith
Page 39 and 40: monetary penalties and a publicatio
Page 41: number of oppositions by companies.
Page 45 and 46: Thus, it is also obvious that revis
Page 47 and 48: the transaction. Instructors who wi
Page 49 and 50: HHL-Arbeitspapiere / HHL Working Pa
Page 51 and 52: 77 La Mura, Pierfrancesco; Swiatcza
Page 53 and 54: 47 Fischer, Thomas M.; Schmöller,
Page 55 and 56: 15 Hungenberg, Harald (1998) Kooper

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