Mylan to Pay $30 Million for Disclosure and Accounting Failure Relating to EpiPen FOR IMMEDIATE RELEASE 2019-194 Washington D.C., Sept. 27, 2019 — The Securities and Exchange Commission today announced charges against Pennsylvania-based pharmaceutical company Mylan N.V. for accounting and disclosure failures relating to a Department of Justice (DOJ) probe into whether Mylan overcharged Medicaid by hundreds of millions of dollars for EpiPen, its largest revenue and profit generating product. Mylan agreed to pay $30 million to settle the SEC's charges. 

According to the SEC's complaint, Mylan classified EpiPen as a "generic" drug under the Medicaid Drug Rebate Program, which resulted in Mylan paying much lower rebates to the government than if EpiPen had been classified as a "branded" drug. The complaint alleges that in October 2014, the Centers for Medicare and Medicaid Services (CMS) informed Mylan that EpiPen was misclassified as a generic drug. Starting in November 2014, and continuing for nearly two years, the DOJ conducted a civil investigation into whether Mylan misclassified EpiPen and thereby overcharged the government for EpiPen sales to Medicaid patients. During the investigation, DOJ issued multiple subpoenas and investigative demands, rejected Mylan’s arguments to close the investigation, and indicated its intent to sue Mylan if Mylan failed to make a settlement offer. As alleged in the complaint, Mylan produced documents and other information to the DOJ, including providing potential damages calculations and making offers of settlement. As alleged in the complaint, public companies facing possible material losses from a lawsuit or government investigation must (1) disclose the loss contingency if a loss is reasonably possible; and (2) record an accrual for the estimated loss if the loss is probable and reasonably estimable. Mylan, however, failed to disclose or accrue for the loss relating to the DOJ investigation before October 2016, when it announced a $465 million settlement with DOJ. As a result, Mylan's public filings were false and misleading. Further, as alleged in the complaint, Mylan's 2014 and 2015 risk factor disclosures that a governmental authority may take a contrary position on Mylan's Medicaid submissions when CMS had already informed Mylan that EpiPen was misclassified, were misleading. "As alleged in our complaint, investors were kept in the dark about Mylan's EpiPen misclassification and the potential loss Mylan faced as a result of the pending investigation into the misclassification," said Antonia Chion, Associate Director in the SEC's Division of Enforcement. 

"It is critical that public companies accurately disclose material business risks and timely disclose and account for loss contingencies that can materially affect their bottom line." The SEC's complaint, filed in federal court in Washington, D.C., charges Mylan with violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. Without admitting or denying the SEC's allegations, Mylan has agreed to the entry of a final judgment ordering a $30 million penalty and permanently enjoining it from violating those provisions. The SEC's investigation was conducted by Ian Dattner and Daniel Maher, under the supervision of Lisa Deitch, Peter Rosario, and Antonia Chion.

Required: Look at the press release and reports on internal control over financial reporting. We don’t know anything other than what is reported in the press release, so let’s take the information as an adequate representation.
1. What would have been the financial effect of accruing the loss? Why might Mylan have been reluctant? Consider two constituencies: the reaction of investors and the reaction of plaintiffs.
2. What processes might be placed to review for lawsuits that might need accruing? If they did, how does an internal control get overridden or bypassed?

COSO has this to say about a preferred process: Reviewing the completed financial reporting checklist (which is periodically updated for changes in financial reporting rules and standards) to ascertain that material presentations and disclosures have been prepared in accordance with Generally Accepted Accounting Principles.
 

I saw these reports on internal control over financial reporting on the Mylan annual reports. Management stated DELOITTE & TOUCHE LLP stated 2014 2015 2016 management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2014 management has concluded that the Company maintained effective internal control over financial reporting as of December 31, 2015 Company maintained effective internal control over financial reporting as of December 31, 2016 our report dated March 2, 2015 expressed an unqualified opinion on the Company's internal control over financial reporting. our report dated February 15, 2016 expressed an unqualified opinion on the Company's internal control over financial reporting our report dated March 1, 2017 expressed an unqualified opinion on the Company's internal control over financial reporting