Biovail Corporation. a major Canadian pharmaceutical company listed on the New York Stock Exchange. announces that it will lose its quarterly net incomes mark by $ 25 to $ 45 million. faulting $ 10 to $ 15 million of the deficit on a truck accident affecting a cargo that left its installation on the last twenty-four hours of the one-fourth. The instance was finally prosecuted by the U. S. Securities and Exchange Commission ( SEC ) . The instance is centered on the inquiry of gross acknowledgment and how the company should hold accounted for the gross revenues ( FOB transportation or FOB finish ) . However. it besides provides a rich scene allowing geographic expedition of peripheral subjects around the moralss of net incomes direction. For illustration. the instance discusses stock analysts’ reactions to the proclamation ; inquiries how much merchandise was really in the truck ; inquiries how sharply the company responds against the analysts who downgrade the stock ; and foreground the function of the SEC in enforcement. Besides that. Biovail’s stock had listed on both the Toronto and New York stock exchanges.

Biovail filed one-year studies to the U. S. SEC and prepared fiscal statements in conformity with both U. S. and Canadian by and large accepted accounting rules ( GAAP ) . On 30 September 2003. there was a truck transporting a cargo of Wellbutrin® XL from Biovail’s fabricating installation in Manitabo to Biovail’s Distributor. North Carolina was involved in a accident near Chicago. The company announced that the loss of the quarterly net incomes which target by $ 260 million is because of the truck accident happened. There are several issues in this instance which included accounting policy based on the gross acknowledgment ; how Biovail Corporation should account the gross revenues based on two different “Freight On Board” ( FOB ) point which are FOB Shipping point and FOB Destination point. and ethic of gaining direction where Biovail is suspected might significantly overrate the value of the merchandise that involved in the truck accident due to Biovail fail to run into its 3rd one-fourth 2003 net incomes counsel. downgrade of stock evaluation on Biovail. bad direction control and corporation civilization. ( Unethical ) .

Statement of the Problem
1. Accounting policy based on the gross acknowledgment: How Biovail Corporation should account the gross revenues based on two different “Freight On Board” ( FOB ) point which are FOB Shipping point and FOB Destination point. Harmonizing to this article. Biovail’s CFO told the analyst that Biovail’s contract with the Distributor had title alteration in Manitoba when it left the transportation dock ( FOB Shipping point ) . but the understanding between Biovail and the Distributor provided that the rubric to. and hazard of loss with regard to. the merchandise would non passed to the Distributor until the merchandise was delivered to the Distributor’s installation ( FOB Destination ) . These two different Freight On board ( FOB ) indicates different minutes of gross acknowledgment. Harmonizing to the FOB status: Transportation Point: The Company should acknowledge gross at the moment/in the period in which merchandise leaves Biovail transportation dock at the warehouse since in that precise minute both ownership and duty over the goods is transferred from Biovail to the client.

Finish: The Company should acknowledge gross at the moment/in the period in which merchandise is delivered to the Distributor’s installation since in that precise minute both ownership and duty over the goods is transferred from Biovail to the client. Four conditions must be met in order to acknowledge gross that recognized by GAAP are ; 1. Persuasive grounds of an agreement exists: Although the instance does non supply excess information on this facet. it seems clear that there is an ongoing relationship between Biovail and the Distributor and that surely there was a measure. purchase order and/or bill in order to back up this sale. 2. Seller’s monetary value to the purchaser is fixed or determinable: The instance provides clear grounds in this facet. 3. Collection is moderately assured: given the ongoing relationship between Biovail and the Distributor. it appears apparent that this facet was likely covered every bit good. 4. Delivery has occurred or services have been rendered: this is the cardinal point of struggle in the Biovail’s instance. In this instance. by mentioning the criterion by GAAP. Biovail should acknowledge the gross based on the understanding as mentioned by the employee from the Distributor. The conditions that indicated by the GAAP has been met. 2. Earning direction

Another issue that we discover is about gaining direction issue. Biovail had released counsel for the one-fourth ended September 30. 2003 which indicates that the gross would be in the scope of $ 215 million to $ 235 million and net incomes per portion of $ 0. 35 to $ 0. 45. both below antecedently issued counsel. Meaning that. the gross had dropped by $ 25 million to $ 45 million as compared to the market outlook and anterior counsel of about $ 260 million. The company claim that there is a deficit of gross for the 3rd one-fourth due to the truck accident happened. Based on the instance. the truck accident happened on the last twenty-four hours of the terminal of the 3rd one-fourth. where a truck transporting a cargo of Wellbutrin® XL edge for the North Carolina installation of one of the Biovail’s Distributor.

Biovail estimated that the truck involved will lend gross for the 3rd one-fourth is in the scope of $ 10 million to $ 20 million. However. the probe suggest that Biovail might hold significantly overestimated the sum of Wellbutrin® XL on the truck because harmonizing to the information. the cavalryman estimated the truck was about one-quarter full and even if there had been $ 20 million worth of Wellbutrin® XL pills on the truck. the truck should be full of about full. Harmonizing to J. P Morgan. he calculated on how much of the truck would necessitate to be filled to stand for the missing gross. The Biovail Corporation executives were obsessed with run intoing quarterly and one-year net incomes they overstated gaining and hid losingss in order to lead on investor and created the visual aspect of accomplishing end. Because these issue they were involved in a really serious unethical misconduct and chronic deceitful behavior. including fiscal study fraud and other knowing public deceits. The computation is shown as followers:

Measure 1
To cipher volume of ? full of dawdler:
Interior dimensions of a typical 18-wheeler dawdler = 17m ten 4. 5m ten 2. 5m Volume= ( 1. 700 ten 450 ten 250 x ? ) cm3
Therefore. the volume of ? full of Wheeler dawdler is equal to 47. 812. 500 cm3

Measure 2
Calculate volume of a Wellbutrin® XL tablet which was 0. 5cm3 and 1. 00cm3 as packing infinite for each tablet: Length x Width x Height = ( 1. 5 ten 1. 5 ten 1. 5 ) cm3
Therefore. the volume of a Wellbutrin® XL tablet is equal to 3. 375 cm3 Measure 3
Calculate entire tablets in the ? full of dawdler:
= volume of ? full of dawdler ? volume of a Wellbutrin® XL tablet = 47. 812. 500 cm3 ? 3. 375 cm3 =14. 166. 667 tablets
Therefore. a entire tablet in the ? full of dawdler is equal to 14. 166. 667 tablets. Measure 4
Extract 400 % grade up for Distributor and 35 % jobber border from the sweeping acquisition monetary value to get at the original monetary value charged by Biovail which is $ 0. 42 per tablet.

Measure 5
Calculate the existent gross:
14. 166. 667 tablets ten $ 0. 42 per tablet = $ 5. 950. 000 ( estimated gross ) .

Based on this computation. we can see that the existent gross of Biovail is $ 5. 950. 000. It besides prove that Biovail had overestimated their appraisal. Harmonizing to Melnyk. “This accident will hold negative fiscal impact on Biovail’s 3rd one-fourth revenues” . In fact. the accident was merely a cover face for Biovail fiscal study job and had no consequence on 3rd one-fourth net incomes. The accident was non the root of the job but it is merely the symptoms of the job that lead to look into the existent job. The accident was giving Biovail chance to supply the market place with a partial account for the lost net incomes because Biovail has making misdirecting of study in old old ages and Biovail face fabrication jobs. Therefore. it shows that Biovail deliberately misstated both the consequence of the accident on 3rd one-fourth net incomes every bit good as the value of the merchandise involve in the accident. As per Maris province “Biovail should non be able to enter gross from the sale of the drugs in the truck in the 3rd quarter” . 3. Downgrade of stock evaluation on Biovail

Following the proclamation of the truck accident. Canadian Imperial Bank of Commerce announced that it was cutting its stock evaluation on Biovail to Sector Performer from Sector Outperformer and taking the company from the Special Research Series ( SRS ) . efficaciously discontinuing coverage of the stock. The grounds given for the downgrade cited ongoing production holds and operational uncertainnesss at Biovail. Hence. Maris as an analyst require to measure and compare the quality of securities in a given sector or industry and has the duty to understand the consequence of the accident on the house before he signed off on his Sell recommendation because he wanted to do certain that he was giving a best advice to his investing clients. For case. in the instance. Maris has to measure other analyst responses like the Canadian Imperial Bank of Commerce. This is because Maris had to establish on those analysis and do a study with certain recommendations such as bargain. sell. strong bargain or clasp which carry a great trade of weight in the investing.

Bad direction control and corporation civilization. ( Unethical ) Harmonizing to the instance. in the April 2002. Treppel found that the gross and net incomes public presentation of Biovail had non been of high quality and the accounting information was ill-defined. The truck accident that happened in 2003 indicates that the top of Biovail tended to blow up the gross and did non follow with the GAAP. More severely. after Treppel composing a ‘sell’ recommendation. Biovail made a figure of public statements sing Treppel’s coverage which lead to probe of Treppel. These can give us a image of the dishonorable civilization and control where Biovail attempt to conceal its inappropriate accounting action by faulting others. This issue refers to the inquiry no 4 of this instance. The inquiry is. are you concerned about the company’s intervention of analysis that covers the stock? Would you desire to be an analyst covering the company? The reply is yes. I am concerned about the company’s intervention of analysts who cover the stock. for it relates to my employment and repute. And I would non desire to be an analyst covering Biovail because Biovail had a bad direction.

Causes of the Problem
This job might non be happen if the audit commission of Biovail knows their duties and do an ethical behaviour. Many audit commission members intelligibly find themselves slightly unsure ( or wholly at sea ) as to how far their duties goes. or how that responsibilities is to be fulfilled. ( Young. Farr. & A ; LLP. February 21 – 22. 2008 ) . They are non being independent and may unwittingly non describe the overestimation job to the investor. Therefore. it is an unethical things to make because investor does non cognize about the overestimation issues and investor puts their trust to the hearer to pull off the earning efficaciously without holding struggle of involvement.

Without wholly understanding the extent of their duty. commission members find themselves acquiring drawn into the inside informations of gaining imperativeness releases. hearer communications and countless elaboratenesss of corporate administration. Worsening the uncertainness is a mentality among some that has resulted in audit commissions about going dumping land for corporate duties. Among the changing duties that have been suggested for audit commission inadvertence which are environmental conformity. improper payments. struggle of involvement. revenue enhancements. complex fiscal instrument. critical concern continuity hazards. possible legal. conformity and hazard direction issues that a company may confront and compliance with Torahs and ordinances and ethical concern patterns. ( Young. Farr. & A ; LLP. February 21 – 22. 2008 )

Decision Criteria and Alternative Solutions
1. Biovail should beef up its internal control in order to get the better of the earning direction. Strong internal control can avoid deceitful act to happen and able to supply more dependable information to assist investors in determination devising. Harmonizing to COSO. internal control is defined as a procedure. affected by an entity’s board of managers. direction and other forces. designed to supply sensible confidence to guarantee the effectivity and efficiency of operations. dependability of fiscal coverage and conformity with applicable Torahs and ordinances. By holding an effectual internal control. it can guarantee the company have a proper gross acknowledgment which under GAAP.

For illustration. a company that has a good internal control will set up gross acknowledgment commission that serves as the company’s primary internal control. Duties for this commission was included set up and guarantee conformity with the company’s gross acknowledgment policies and processs and behavior meetings at least quarterly to reexamine and discourse important minutess. So. by holding this commission. it can guarantee that the gross acknowledgment policies are accepted and complied with GAAP. Hence. by holding a good internal control can better the dependability of the fiscal information. As a consequence. a company with strong internal control will enable the concern is being well-managed that is expected to win.

2. Biovail Corporation should pattern an ethical rules in manage their concern in order to avoid fraud in misdirecting the fiscal statement and earning of the company. It is supposed that. Biovail Corporation should non hold a job sing to the exaggerating the gross loss because they are able to engage a professional in accounting section in order to follow the accounting criterion. Therefore. the audit commission need to cognize their duties which is they are seeking to supervise a company system of fiscal coverage will happen no deficit of checklists. ( Young. Farr. & A ; LLP. February 21 – 22. 2008 ) . In other word. this ethical issue will non go on if Biovail hire independent parties to pull off their earning direction. So. the job regarding of the overstating gross will non be occurred.

Recommended Solution. Execution and Justification
1. Have codification of moralss and understanding organisation civilization of Biovail Through recognize on organisation civilization that can unwrap the concern ethical which is refer to the moral regulations and ordinance government that preserve in the company. Ethical of a direction individual when procedure a concern will direct impact the benefits for company and investors in the hereafter. So. Davis Maris should understanding the organisation civilization by attentive and unwrap the item candidly particularly if fraudulence issues appear in the organisation. In add-on. action to reexamine on the concern rules in Biovail Corporation besides is the 1 of the suggestions for Davis Maris. This is because concern rule is besides of import for public to maintain investment in that company and will act upon the organization’s growing. Examples for the concern rules are employee’s behaviour. legal demand. sustainable and fulfill the demands of clients. 2. Their employees. particularly who are related to fiscal section. should well-understood about the FOB transportation point and FOB finish to avoid misstatement in fiscal coverage that will misdirect the users of fiscal statements.

The uncertainness of the transporting term usage in the transportation goods is the root of statement happened between Biovail and the Distributor after the accident happened. Therefore. we recommend Davis Maris to analyzing on the sale paperss in order to assist him to find which party should bear the effects and besides to find whether the accident will give consequence on Biovail or non. He besides can acquire more information and aid from external parties such as the attorney to acquire legal advice about which of these. filing with U. S Securities Exchange and understanding between Biovail and Distributor is more superior. This can assist David Maris to make up one’s mind whether FOB transporting point of FOB Destination is qualified as the accounting policy for them. 3. Better independent confirmation and internal control

The CFO should non be the lone individuals in the company verifying the fiscal information such as accounting method. Like in the instance is there about the revelation of FOB gross revenues accounting applied by Biovail. Biovail’s CFO. Brian Crombie who told the analyst about their FOB transportation contract with distributer where the rubric alteration when the truck left its company transportation dock. Meanwhile. an unknown distributer employee stated that the understanding between Biovail and the Distributor which is FOB finish provided that the ownership rubric and hazard would non hold passed to Distributor until the merchandise was reached to Distributor installation.

To avoid such misinterpretation. accounting and other corporate forces throughout the full accounting. fiscal and internal control construction should give the authorization and subscribe off separately to analyst or hearers about any information they control or represent to them. Indirectly. this can assist in fastening Biovail’s internal controls in footings of confirmation of accounting method used by the company. To hold a strong internal control. it needs to be reviewed by competent and independent external hearer. The hazard of ambiguity and deceit of of import accounting information can be minimized by it. Besides. a good internal control helps a company to run expeditiously because direction can do a better determination in footings of direction and accounting informations. Decision

From the recommendation. we agree that better independent confirmation and internal control as the best alternate to work out Biovail Corporation jobs. To hold a strong internal control. the fiscal coverage demands to be reviewed by competent and independent external hearer. For this purpose Biovail Corporation need to avoid any fraud in showing its fiscal studies. In these instances. the SEC’s ailments allege that each of Biovail’s deceitful accounting strategies had a material consequence on Biovail’ fiscal statements for the relevant quarters and old ages. Biovail direction besides deliberately deceived the company’s outside hearer as to the nature of the minutess. When the truck accident happened. the investors know that the fact about Biovail’s failure to accomplish their net incomes. Before the competent and independent external hearer audited the fiscal coverage. Biovail Corporation should do an accommodation for its gross since they already know that their pattern in gross acknowledgment is incorrect and did non follow the U. S GAAP to avoid any legal action.

Mentions

Donald E. Kieso. J. J. ( 2011 ) . Intermediate Accounting Volume 1. United States of America: John Wiley & A ; Sons. Inc. Liang. J. . & A ; Tober. G. P. ( 2009 ) . Identifying Accounting Problems and Adopting Practices to Detect Financial Misconduct: A Primer for Lawyers. Financial Fraud Law Report. ( October ) . 14. Young. M. R. . Farr. W. . & A ; LLP. G. ( February 21 – 22. 2008 ) . Audit Committee. In A Corporate Governance Guide. Third Edition ( pp. 1197-1199 ) . Washington. D. C. . COSO Defination of Internal Controls. ( n. d. ) . Retrieved October 18. 2013. from Minnesota Management & A ; Budget: hypertext transfer protocol: //www. beta. mmb. province. manganese. us/coso-definitions Flashback: Accounting for Biovail’s Truck Accident ( 2010 ) : hypertext transfer protocol: //www. complianceweek. com/blogs/enforcement-action/flashback-accounting-for-biovails-truck-accident # . VCe4bRYkz-o SEC Charges Biovail Corporation and Senior Executives With Accounting Fraud ( 2008 ) : hypertext transfer protocol: //www. sec. gov/news/press/2008/2008-50. html Carton. B. ( 2010. September ) . Flashback: Accounting for Biovail’s Truck Accident. Conformity Week.