An article was written on CNN’s “Money” webpage last month, and it discussed the possibility of a troubling Enron-like fraud occurring in the pharmaceutical industry. A controversy has began to swirl around Valeant, a medical drug firm valued at over fifty billion dollars. They were accused of cooking their books and invoices in a fashion reminiscent of the Enron scandal that shocked investors over a decade ago. The group responsible for these claims is Citron, and CNN’s Matt Egan describes the company as “a short-selling firm that actively bets against stocks and publishes negative research on companies.” Citron believes that Valeant concocted a web of fake pharmacies and drug store chains in an attempt to create “phantom sales.” Phantom sales are made by a fraudulent company in an attempt to create invoices in order to hoodwink auditors and lie about their book revenue. If these claims were to be true, then stockholders as well as run of the mill employees of Valeant would be victimized by the fraud. The pharmaceutical firm denied these charges of phantom accounts and they stated that their sales are only recorded when the good, or drug in this case, is dispensed to the necessary patients. Though it has not been outlined yet, if this situation is comparable to Enron, then several hundreds of millions of dollars are at risk here. As Valeant denied all wrongdoing, the company went on to accuse Citron of only attempting to push down their stock price. The stock price has dropped significantly of late with a dip as low as forty percent at one point, and this trend has little signs of letting up. Even though the CEO if Valeant, J. Michael Pearson, said that his company has always complied with every law on the books, investors have clearly been put off by these serious allegations.
I believe that this is situation we’ve seen before. Firms large and small have tried to mislead auditors as well as investors regarding the worth and success of a particular company. When it is all said and done however, if this Valeant case is truly similar to Enron, then the men responsible will be put behind bars. Pharmaceutical industry is one that should be truthful to a fault. People rely on medications everyday, and when companies like Valeant lie and cheat auditors, how can we be sure they are not also misleading the FDA? Luckily for us, as consumers, groups like the SEC and the US Attorney’s Office keep businesses in line. By misrepresenting your books, you lie to your internal and external shareholders and you hurt your brand. Valeant’s stock has gone down severely, so clearly these “rumors” have staying power in the market.
This article connects to recent conversations in class. On Monday the 9th of November, we were beginning our class discussions on stockholders and how companies interact with they stockholders. People put time and energy into their investments with companies, and it is relevant when companies violate that trust. By “fudging” their accounting books, Valeant has broken the trust of their stockholders. The corporate governance of Valeant is broken and must be fixed. Previously in this semester, we discussed financial fraud, so this article is indeed relavent to our course.