On April 8, 2014, the SEC brought a civil enforcement action against CVS Caremark Corp. alleging that the company’s unaudited financial statements for the third quarter of 2009 were materially false because an aspect of the accounting treatment for the 2008 acquisition of the Longs Drugs chain did not comply with GAAP. In a separate administrative case, the Commission charged CVS’s retail controller with causing these violations. The Commission also charged that, in connection with a October 2009 securities offering, CVS failed to disclose information concerning the loss of future revenues in CVS’s pharmacy benefits business. Without admitting or denying the Commission’s allegations, CVS consented to the entry of an injunction against future violations and a $20 million fine. The controller agreed to settle by paying a $75,000 penalty and being barred for at least one year from practicing as an accountant on behalf of any publicly traded company or other SEC-regulated entity.
With respect to the alleged accounting errors in the November 5, 2009 Form 10-Q, the SEC’s press release describing the case states that the violations stemmed from the reversal of depreciation on certain assets acquired in the $2.54 billion purchase of Longs:
“CVS improperly reduced the value of $189 million of personal property in the Longs stores down to $0, and then reversed $49 million of depreciation that had been taken on those assets since the acquisition. The undisclosed depreciation reversal increased the third-quarter earnings and enabled CVS to exceed analysts' expectations at a time when it was otherwise announcing significant bad news about earnings projections in its pharmacy benefits line of business.”
CVS noted in a press release that it had not been required to restate its earnings.
Comment: As described in the July 2014 Update, the SEC has formed a Financial Reporting and Auditing Task Force and announced a get-tough approach to financial reporting violations. Like the PACCAR case
9 Update │ May 2014
described in that Update, the CVS case is a piece of the puzzle illustrating what this focus on financial reporting may mean for public companies. The case is also a reminder that the SEC views accounting adjustments, regardless of size, to be material, if an adjustment causes the company to meet or exceed analysts’ earnings expectations. Such adjustments are likely to receive close scrutiny.