The Public Company Accounting Oversight Board announced a
Stone was the partner in charge of the 2007 audit of ArthroCare. His violations included ignoring or failing to properly address numerous indicators of improperly recognized revenue in significant unusual transactions, according to the PCAOB .
The order bars Stone from associating with a registered public accounting firm—with the right to petition the PCAOB to remove the bar after three years—and imposes a $50,000 civil money penalty and a censure. Stone consented to the order without admitting or denying the findings.
The PCAOB began the disciplinary proceeding in December 2012, but it remained nonpublic until now, as required by the Sarbanes-Oxley Act.
The PCAOB said Monday it found that Stone ignored or failed to properly evaluate numerous indicators that should have alerted him to the possibility that ArthroCare was improperly recognizing revenue on its 2007 sales of medical devices to DiscoCare, Inc. Such indicators included unusual pricing and payment terms, quarter-end sales spikes, and evidence that ArthroCare may have funded DiscoCare's purchases through monthly service fee payments. Sales to DiscoCare helped ArthroCare meet its revenue forecasts for 2007.
"Revenue often is a key metric for public company investors and is a financial reporting area prone to manipulation by management," said PCAOB director of enforcement and investigations Claudius B. Modesti in a statement. "When an auditor is confronted with multiple indicators of problematic revenue recognition, as happened here, he or she must get to the bottom of the relevant issues, including digging into management's representations."
The board also found that Stone violated PCAOB rules and standards in auditing ArthroCare's accounting for its acquisition of DiscoCare in December 2007. Stone failed to exercise due professional care and skepticism when, among other things, he agreed with the company's proposed accounting for the acquisition without adequately assessing whether such accounting treatment complied with generally accepted accounting principles, according to the PCAOB.
In addition, the board found that Stone violated PCAOB rules and standards in authorizing PwC's consent to incorporate its previously issued 2007 audit report in ArthroCare's June 2008 Form S-8 registration statement without first completing a reasonable subsequent events investigation.
The PCAOB found that when Stone authorized PwC's consent, he was aware of new allegations of impropriety concerning ArthroCare's relationship with DiscoCare in 2007, and he knew that ArthroCare and PwC were continuing to assess those allegations.
