Current Issue Assignment - Article Summary and Analysis - Essay Example

This paper discusses a news article from Business Week, published on October 30, 2006, relating to Taro Pharmaceutical Industries Ltd.’s recent experience with financial misstatements. The article is divided into three parts: a summary, the article’s relation to financial management concepts, and a critical analysis by the author of the paper. Taro Pharma May Have To Shut Down IndefinitelySummary of the Article, “Taro Pharma CFO Resigns after Report”The Israeli drug developer, Taro Pharmaceuticals Industries Ltd.

, has recently lost its Chief Financial Officer along with another financial management executive because of a report that “assigned responsibility for the company’s financial misstatements,” according to a news article published in Business Week on 30 October 2006, “Taro Pharma CFO Resigns after Report,” and submitted through The Associated Press (Hawthorne, NY). Taro has hired a law firm to probe the details of the case gathered by its own audit committee. Furthermore, the company has reported that “a member of the company’s senior financial management caused Taro to make misleading statements” to the SEC and the company’s auditor, Ernst & Young.

The CFO of Taro and the unidentified financial management officer “vigorously disagreed” with the report before they both resigned. The company is yet to file its 2005 annual report to the Nasdaq National Market. Taro plans to reapply for listing if it is delisted this year for missing the deadline by 17 November 2006. At present, the company has an interim chief administrative and restructuring officer, whose main job is to help Taro reduce its costs and restructure debt. The company is looking to obtain bank waivers as it cannot be compliant with some of its creditors because of the late filing of the annual report.

The Article’s Relation to Financial Management ConceptsFor a company to ensure that it is legally safe and financially sound in the short as well as the long run, it is crucial to have financial statements that are both accurate and foolproof (Spiro 1996). Any financial management officer may blunder with numbers, either deliberately or not so. Inaccurate financial statements may wreck the budgeting process, cause significant damage to a company’s reputation, and make it rather difficult for it to obtain loans in future.

True financial statements are the lifeblood of an organization. A company is connected with the public at large through its products and services, and also its shareholders, suppliers, and the families of its employees, besides its lenders (Spiro). A financial misstatement – depending on the discrepancy between a correct financial statement and a financial misstatement – may hurt all the members of society it interacts with, no matter who is responsible for the error. Finally, it is vital for all financial managers to team up with other employees of an organization that are somehow related to its financial structure.

To work on cost-reduction is not an easy task. Financial managers must consult with various departments to make it reality. Similarly, correcting errors is the task of many organizational departments. Financial managers should check and recheck that they are handling their responsibilities perfectly. Financial statements are, in truth, about perfection (Spiro). Critical Analysis of the Article Taro Pharmaceuticals Industries Ltd. must be lauded for making a collectively organized effort to counter the problem of financial misstatements.

Depending on the nature or the extent of the problem, however, the firm may have to cope with extensive damage in the days to come. This damage could take the shape of a lawsuit, whereby the guilty party is charged with fraud under the new Sarbanes-Oxley Corporate Reform Act of 2002. The fact that the Chief Financial Offer plus an unnamed financial management executive have resigned does not free them from the possibility of being charged for making financial misstatements. Under the current corporate laws in the nation, it is a serious crime for a company to make financial misstatements to both SEC and its own auditor.

There is a probability that both the CFO and the financial management officer who has resigned along with him, are absolutely innocent in this case. If the financial misstatement is a huge error on the part of the company, it is also possible that another senior management official is involved. We have seen through the Enron debacle how complicated such situations could turn out. Regardless of the person responsible for the misstatements, Taro may have to close down because it is not meeting its creditors’ requirements.

Depending on the extent of the damage and how seriously it affects the government’s position to deal with such a circumstance, Taro may never be able to borrow money again for its operations. References1. The Associated Press (Hawthorne, NY). “Taro Pharma CFO Resigns after Report.” Business Week, 30 October 2006. 2. Spiro, Herbert T. Finance for the Nonfinancial Manager. 4th ed. New York: John Wiley & Sons Inc, 1996.http://www.businessweek.com/ap/financialnews/D8L2VUEO3.htm?chan=search The Associated Press/HAWTHORNE, N.Y.Taro Pharma CFO resigns after reportOCT.

30 8:33 A.M. ET Israeli drug developer Taro Pharmaceutical Industries Ltd. said Monday Chief Financial Officer Kevin P. Connelly and another unnamed financial management executive resigned after a report assigned responsibility for the companys financial misstatements.In a statement, the company said Jenner & Block LLP, a law firm hired to probe facts assembled by the companys audit committee, reported that "a member of the companys senior financial management caused Taro to make misleading statements" to the Securities and Exchange Commission and Ernst & Young, the companys auditor.

Taro, which immediately launched a search for a new CFO, said Connelly and the other individual "vigorously disagreed" with the reports findings.The company launched the probe because it needed to restate financial results for 2003 and 2004, resulting in a delayed filing of its 2005 annual report to the SEC. Otherwise, the report noted there did not seem to be "an intentional misstatement of reserves relating to sales to wholesale customers" -- the original reason for the companys restatement.

The company presented the report to the Nasdaq National Market and has until Nov. 17 to file its 2005 annual report. Being that Ernst & Young must still review the report before the annual report can be filed, there is no guarantee Taro will meet the deadline. If the company misses the deadline and is delisted, Taro said it will reapply for listing after it files its annual report.Taro also said it hired Rebecca A. Roof, a managing director at corporate turnaround specialists AlixPartners, as its interim chief administrative and restructuring Officer.

Roof will help the company find ways to cut costs and restructure its debt. The company is not compliant with some of its creditors because of the late filing, and is in talks with lenders to obtain bank waivers.