Compliance Issues

Topic 1: Outsource accounting practices

In an attempt to comply with the Sarbanes-Oxley Act and cut operating costs, Endo Pharmaceuticals Holdings Inc., a specialty pharmaceutical company with an established leadership in pain management took a major risk in finding the optimal solution. In response to Endo's compliance and cost saving problems, the firm decided to outsource parts of the company, specifically, the finance and accounting portions. Many pharmaceutical companies believe that Endo's decision to outsource exhibits more risk than opportunities. Joe McCracken, SVP of business and commercial development at Genentech believes that outsourcing business practices carry a high risk for error and in the drug and biotech industries, mistakes can carry big price tags. Mr. McCraken also says that, "Regulators could delay approval, or a drug's true effect could be masked, compromising results. In the worst case, patients could be harmed and massive liabilities incurred". "We have a very low threshold for error. We have to do everything right, and we are in a hurry. We feel like people are waiting for us to get important new products approved for the treatment of life-threatening, life-altering diseases. This is the really key driver of our business and why we are in one location in South San Francisco and why we are not interested in outsourcing."

Despite the difference of opinion of competing pharmaceutical companies, the results of Endo Pharmaceuticals decision to outsource has lead to favorable results for the company. Jeffrey Black, chief financial officer of Endo Pharmaceuticals Holdings Inc., stated that outsourcing a portion of internal audit has made it easier to comply with Sarbanes-Oxley by giving the company access to experts. "We were able to address some of the concerns of Sarbanes-Oxley and draw on expertise from outside groups with experience in implementation and monitoring the rules," he says (Rea, 2004).

CareNetWest can consider outsourcing some aspects of the company's financial practices in order to remain in compliance with Sarbanes-Oxley as well as benefit from cost saving initiatives. As with CareNetWest; Endo Pharmaceuticals Holdings Inc. has experienced an array of compliance issues which have interrupted other aspects of company operations but through due diligence and careful planning has found outsourcing as an appropriate solution in reaching their end-state goals. Therefore, CareNetWest can also consider outsourcing as an option.

Topic 2: Avoiding consequences of noncompliance

Richard M. Scrushy, the former chairman and CEO of HealthSouth Corporation, provider of outpatient surgery, diagnostic imaging, and rehabilitative healthcare services hired an outside financial auditor in order to handle financial reporting and compliance. The results of hiring this firm resulted in $2.5 billion in fines for fraud and noncompliance with the Sarbanes - Oxley Act. "Apparently, Scrushy signed off on fraudulent accounting figures because he "unknowingly" trusted the five CFOs who had served under him (Marden &