CASE 7.1
LIGAND PHARMACEUTICALS
Synopsis
In December 2007, the PCAOB sanctioned Deloitte & Touche. The sanctions, which included a
$1 million fine, were noteworthy because it was the first time that the new federal agency had
punished a Big Four accounting firm. The PCAOB sanctioned Deloitte for its alleged failure to take
“meaningful steps to assure the quality of audit work” on the 2003 audit of Ligand Pharmaceuticals,
a San Diego-based company. At the time, Ligand described itself as an “emerging R&D and
royalty-driven biotechnology company.”
The PCAOB’s principal complaint against Deloitte was that the firm had not taken appropriate
measures to ensure that the 2003 Ligand audit was properly staffed. In particular, the PCAOB
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Ligand Pharmaceuticals—Key Facts
272 Case 7.1 Ligand Pharmaceuticals
1. The Enron and WorldCom debacles prompted the federal government to pass the Sarbanes-
Oxley Act of 2002.
4. The creation of the PCAOB and other regulatory reforms introduced by SOX further
complicated the already stressful role of audit partners with major accounting firms.
5. James Fazio, a Deloitte audit partner, served for several years as the audit engagement partner
6. During the 2003 Ligand audit, Fazio authorized the issuance of an unqualified opinion on
7. While reviewing Ligand’s 2004 first-quarter financial statements, Fazio obtained additional
9. Shortly before the 2003 audit was completed, several top Deloitte partners called on Fazio to
resign from the firm because he was perceived as a “quality risk.”
11. In May 2005, Ligand announced that it would restate its financial statements for 2002, 2003,
Instructional Objectives
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2. To identify the regulatory responsibilities of the PCAOB.
3. To examine the role and responsibilities of an audit engagement partner.
Suggestions for Use
This is a landmark case in that it was the first in which the PCAOB sanctioned one of the Big
Four accounting firms. You can use this case in a variety of ways. First, you can use it to highlight
auditing issues related to revenue recognition. Second, you could use it to discuss the role and
importance of an audit engagement partner to the successful outcome of an audit. Finally, the case
Suggested Solutions to Case Questions
1. As a caveat, I did not have access to Deloitte’s policy and procedures manual, which means that
I do not know specifically how the firm defined “engagement risk.”
Most likely, Deloitte used (or uses) the term “engagement risk” to refer to the overall economic
risk that a specific engagement poses to the firm. The audit risk posed by a given client would be the
key source of engagement risk. Of course, audit risk is a multiplicative product of inherent risk,
274 Case 7.1 Ligand Pharmaceuticals
2. The principal quality control mechanisms for an independent audit are the ten generally
accepted auditing standards referred to in the previous answer. In the context of this case, the first
general standard is particularly apt: “The audit is to be performed by a person or persons having
adequate technical training and proficiency as an auditor.” Just as relevant to this case is the third
general standard: “Due professional care is to be exercised in the planning and performance of the
3. The overriding accounting concept in this context is the revenue recognition principle. This
principle requires that for revenue to be recognized or recorded it must first be realized and earned.
“Revenues and gains are realized when products (goods or services), merchandise, or other assets are
exchanged for cash or claims to cash . . . revenues are considered to have been earned when the
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4. AU 561, “Subsequent Discovery of Facts Existing at the Date of the Auditor’s Report,” could be
applied to this scenario. That section of the auditing standards generally requires auditors to
5. Consider having your students address this case question in an out-of-class group project. Then
have the individual groups provide brief oral reports of their findings.
The PCAOB has been operating for only a few years, nevertheless, it has already received its
fair share of criticism, both from the accounting firms that it oversees and from third parties external
to the accounting profession. Listed next are specific examples of PCAOB criticism that I found by
searching online databases.
—The PCAOB has failed to prevent audit failures. Since the inception of the PCAOB, there have
Is this and other criticism of the PCAOB justified? Require individual students or student
groups to address this issue and defend/justify their position.
Listed next are specific examples of measures that the PCAOB could adopt to respond to the
criticism listed above and other criticism.
—Easy answer: seek additional government funding to increase the scope of its inspection program.