Read Case Study 13-1, “Accounting for Contingent Assets: The Case of Cardinal Health,” from Chapter 13 in the textbook.
In a 300-word executive summary to the Cardinal Health CEO, address the following:
- Explain the potential justification for deducting the expected litigation gain from cost of goods sold, and explain why Cardinal Health chose this alternative rather than reporting it as a nonoperating item.
- Explain what the senior Cardinal Health executive meant when he said, “We do not need much to get over the hump, although the preference would be the vitamin case so that we do not steal from Q3.” Include specific clarification of the phrase “not steal from Q3.”
- Explain specifically what Cardinal Health did to get into trouble with the SEC.
- Justify the timing of the $10 million and $12 million gains, and explain how Cardinal Health’s senior managers defend these decisions.
- Cardinal Health received more than $22 million from the litigation settlement. Discuss whether the actions of Cardinal Health senior managers were so wrong that they justified the actions of the SEC. Classify Cardinal Health’s behavior on a scale from 1-10, with 1 being “relatively harmless” and 10 being “downright fraudulent.” Justify your rating.