-- This article was written by Sarah Pringle of The Deal
As Valeant Pharmaceuticals (VRX) pins the blame on its former CFO for its misstatements of earnings amid the continued reshuffling of directors and management, experts say a closer look at the embattled drug company's board and audit committee is warranted.
"While blame for this failure should fall upon management, in particular, the CFO, culpability has to extend to the audit committee," said Charles "Chuck" W. Mulford, the founding Director of Georgia Tech's Financial Reporting and Analysis Lab.
The troubled drugmaker on Monday revealed that it had asked Howard Schiller, Valeant's former CFO and former Controller, to tender his resignation as a director. Valeant in an 8K filing said Schiller had refused to step down, while claiming that his improper conduct had resulted in the provision of incorrect information to the Ad Hoc committee and the company's auditors, and ultimately the company's misstatements of earnings for its fiscal year 2014. Schiller meanwhile denied any improper misdoings.
The allegations came in tandem with an announcement by the Laval, Quebec-based company that activist Bill Ackman has been appointed to Valeant's board of directors, joining his colleague at Pershing Square Capital Management LP Stephen Fraidin. Valeant also revealed it would be launching a CEO search amid the departure of J. Michael Pearson.
"That group [the audit committee] has failed in certain of its primary responsibilities, in particular for oversight of the financial reporting process and the system of internal controls," said Mulford, who also serves as the Invesco Chair and a professor of accounting at Georgia Tech. "The reporting failure suggests to me that, in addition to addressing changes in management, changes are also needed in the audit committee. At a minimum, I would argue that the committee's chair should be changed."
The chair of Valeant's Audit and Risk committee is Norma Ann Provencio, who besides serving as an independent director on Valeant's board since September 2010 has also chaired the audit committee at Beazer Homes USA Inc. since November 2009. The former partner at Arthur Andersen and KPMG also previously served as an independent director at Signalize Inc. and International Aluminum Corp., according to data from BoardEx, an affiliate of The Deal. Provencio is also the founder and owner of Provencio Advisory Services.
The allegations aimed at Schiller, who joined Valeant after spending 24 years at Goldman Sachs (GS), will obviously raise questions, agreed Charles Elson, chief of the University of Delaware's Center for Corporate Governance.
"If something comes up that's problematic, where was the audit committee and the auditors?" Elson said. "But at this point it's a ship taking oil out of water. You've got to deal with the cards you've been dealt."
Indeed. The financial reporting failure identified by an Ad Hoc committee is arguably a trivial matter in comparison to the allegations relating to Valeant's relationship with mail-order pharmacy Philander Rx Services and Philidor customer R&O Pharmacy, as well as the company's legal but questionable accounting gamesmanship.
Valeant's Ad Hoc committee, led by newly appointed board chairman Robert Ingram, identified misstatements that would reduce its previously reported fiscal year 2014 revenue and net income by about $58 million and $33 million, respectively. In other words, the $58 million in net revenue relating to sales to Philidor that should have not been recognized is less than 1% of the approximately $8.26 billion in total revenue Valeant posted in fiscal 2014.
Kirkland & Ellis' Mark Filip, the former deputy attorney general of the United States, was appointed by Valeant's Ad Hoc committee on Oct. 30 to provide counsel on its review.
Besides Provencio, Theo Melas-Kryiazi is the only additional member of Valeant's 14-person board that currently sits on the company's Audit committee after Katharine (Kate) Berghuis Stevenson voluntarily agreed to step down, according to the company's Monday filing with the SEC.
Melas-Kryiazi, having served as an independent director at Valeant since September 2010, is also a director at both Moderna Therapeutics and GeNo, and has served as CFO of Levitronix since July 2006, BoardEx data shows. The Valeant director has held various other board and executive positions over the years at companies including Helicos BioSciences, Glenrose Instruments, ThermoSpectra and Action Alerts PLUS holding Thermo Fisher Scientific (TMO), the latter at which Melas-Kryiazi served as CFO from January 1999 to October 2004.
Peter Barton Hutt, who as senior counsel at Covington & Burling sits on the board of Moderna Therapeutics alongside Melas-Kryiazi, characterized the director as "detailed, thorough and consciousness," and even went so far to describe him as "the best audit committee chair I've ever seen."
Stevenson, which had been an independent director at Valeant since September 2010, is also an independent director at CIBC (Canadian Imperial Bank of Commerce) (CM), CAE (CAE) and Open Text (OTEX). Stevenson got her start at JPMorgan Chase (JPM) in 1985, where she subsequently held various positions until joining Nortel Networks in 1995, ultimately becoming the company's treasurer.
Of remaining members of the board, Ackman and Fraidin are far from alone in having finance-related backgrounds.
Ronald (Ron) Harold Farmer, a member of Valeant's board since August 2011, has been a managing director at Mosaic Capital Partners since 2004, having previously held leadership positions at McKinsey & Co., including leading the firm's Canadian Practice, BoardEx data shows.
Meanwhile, Garrison Mason Morfit and D. Robert Hale, who joined the company as independent directors in October and August, respectively, are both tied to San Francisco hedge fund ValueAct Capital Partners.
As the drama continues to unfold at the drugmaker, the presence of Ackman in the boardroom will undoubtedly added a new dynamic.
"He's very vocal and there's a commonality of interest to him," Elson said, indicating that the board is unlikely to fight the activist. "In a crisis people tend to work together."
A spokeswoman for Valeant declined to comment.
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