Question

Go to the PCAOB website and find information related to the Ligand case (under Disciplinary Proceedings). Discuss the separate-but-related issues affecting both the engagement partner who was disciplined and the public accounting firm's monetary penalty. Present your thoughts about the fairness and appropriateness of the PCAOB’s actions related to the individual partner and the firm. 1 page 275 word

Answer 1

NOTE:When answering the questions in the test on the Ligand Pharmaceuticals case, theinformation contained in the readings that have been assigned for the Ligand Pharmaceuticalscase control; that is, if anything I say during this lecture or anything contained in these lecturenotes conflicts with what you encounter in the readings assigned for this case, you should rely onthe readings when answering the test questions. (The reason for this statement is simple: For thelecture, I will sometimes draw on sources that are not listed in the reading list for this topic; Ihave found that dates, names, and dollar amounts can vary among media sources. Therefore, toincrease the likelihood that you do well on the tests, I will confine answers to those found in thereading material, including the text, assigned for this case.)

I.This case is about a company feeling pressure to report sales and an audit partner whodid not exercise a sufficient degree of professional skepticism and thus did notperform well in his role as the public watchdog.

II.History of Ligand Pharmaceuticals

A. Ligand originally began in September 1987 as a company named Progenx, Inc., acompany that licensed technology to develop cancer detection and therapyproducts. It was formed by Brook partner in Kleiner Perkins Caufield &Byers, a San Francisco venture capital firm. Progenx, Inc. was located in La Jolla,California.

B. Byers recruited Howard Birndorf in 1988 to serve as chief executive. Howard,who had a graduate degree in biochemistry, was also an entrepreneur, havinglaunched biotechnology start-up companies.

C. In 1989, Progenx, Inc. shifted its emphasis to infrared work and licensed itstechnology from the Salk Institute. In December of that year, it changed its nameto Ligand (a reference to the chemical complex that forms around a central atomor molecule).

D. In 1991, Birndorf departed to work on another start-up company and was replacedby David Robinson, an executive with 20 years of experience at majorpharmaceutical companies. At that time, Ligand had 71 employees (small byindustry standards) and still had no sales.WhenRobinson became chief executive,he expected to make the business successful within five years and then leave thecompany. He stayed for more than 10 years because success didn’t come withinthe five years.

E. In 1991, Ligand entered into the first of many collaboration agreements withPfizer Inc. to develop osteoporosis therapies.

F.In 1992, Ligand entered into another agreement, this one with Allergan Inc. Thetwo companies agreed to work together on skin disorders, specifically Kaposi'ssarcoma, caused by AIDS. The agreement required Allergan to invest $20 millionin Ligand.

During this year and for the first time, Ligand was able to book revenues eventhough it had no products to sell. It did this as a result of arrangementswith somewell-established drug companies. Although Ligand reported $5.5million in revenues in 1992, it incurred a $14 million net loss. In 1993, it reported$16.1million in revenues and a loss of $19.5 million.

G.Also in 1992, Robinson worked on an initial public offering (IPO) of Ligand'sstock, but before the IPO could occur, the value of biotech stocks dropped and theIPO had to be postponed. By the end of 1992, underwriters for the Ligand IPOdevised a new way to attract investors: Create two classes of stocks, Class A andClass B, each with similar voting rights. The IPO would only comprise Class Ashares, which would trade publically. The venture capitalists and insiders whoowned stock prior to the IPO would own the Class B shares and have theopportunity to convert 25% of their Class B shares to Class A shares. At the endof two years after the IPO, if the value of Ligand's stock was below $15.875 (itwas initially offered at $11 per share), the company would issue additional sharesto Class A shareholders to make up the difference in value.The IPO agreement gave Robinson two years to increase the value of Ligandstock so that Ligand would not have to issue additional shares. To do this,Robinson entered into additional collaborative agreements with otherpharmaceutical companies.Nevertheless, the stock had a value of $12 per share at the end of the two-yearperiod. In late 1994, Ligand converted Class A shares into Class B Shares andissued additional shares to Class A holders to make up the difference in value. Asa result, insiders lost value because the ownership of non-insiders (those whoowned stock due to the IPO) increased from 25 percent to 30 percent.

H. It continued to enter into collaborative agreements with other pharmaceuticalcompanies after 1994 and in late 1998 increased its ability to make sales in theUnited States by establishing a 20-person sales force. In 1999, Ligand was able toincrease its force to 40 when it received FDA approval on two drugs within thespace of one week, which boosted the perception that it would be profitable.Unfortunately, Ligand was not profitable that year nor was it to be profitable inany other year. Because of increasing levels of sales, it was able to maintain theperception that it would eventually become profitable one day and thus was ableto continue to forge research agreements with profitable companies, such asBristol-Myers Squibb, which signed an agreement with Ligand in the year 2000.

I.Throughout the year 2000 and in later years, Ligand would continue its struggle tobecome profitable.Around the year 2000, Deloitte & Touche LLP became itsauditor. It resigned as its auditor in August 2004 amid allegations that it had performed a substandard audit of Ligand's 2003 fiscal year.