PCAOB Announces Settled Disciplinary Action Against Former PricewaterhouseCoopers LLP Partner for Audit Failures

The Public Company Accounting Oversight Board today announced a settled disciplinary order against Randall A. Stone, CPA, of Austin, Texas, a former PricewaterhouseCoopers LLP partner, for violating PCAOB rules and standards in PwC's 2007 audit of ArthroCare Corporation.

Stone was the partner in charge of the 2007 audit. His violations included ignoring or failing to properly address numerous indicators of improperly recognized revenue in significant unusual transactions.

The order bars Stone from associating with a registered public accounting firm — with the right to petition the Board to remove the bar after three years — and imposes a $50,000 civil money penalty and a censure. Stone consented to the order without admitting or denying the findings.

The Board began the disciplinary proceeding in December 2012, but it remained nonpublic until now, as required by the Sarbanes-Oxley Act.

The Board found that Stone ignored or failed to properly evaluate numerous indicators that should have alerted him to the possibility that ArthroCare was improperly recognizing revenue on its 2007 sales of medical devices to DiscoCare, Inc. Such indicators included unusual pricing and payment terms, quarter-end sales spikes, and evidence that ArthroCare may have funded DiscoCare's purchases through monthly service fee payments. Sales to DiscoCare helped ArthroCare meet its revenue forecasts for 2007.

"Revenue often is a key metric for public company investors and is a financial reporting area prone to manipulation by management," said Claudius B. Modesti, Director of PCAOB Enforcement and Investigations.

"When an auditor is confronted with multiple indicators of problematic revenue recognition, as happened here, he or she must get to the bottom of the relevant issues, including digging into management's representations," added Modesti.

The Board also found that Stone violated PCAOB rules and standards in auditing ArthroCare's accounting for its acquisition of DiscoCare in December 2007. Stone failed to exercise due professional care and skepticism when, among other things, he agreed with the company's proposed accounting for the acquisition without adequately assessing whether such accounting treatment complied with generally accepted accounting principles.

In addition, the Board found that Stone violated PCAOB rules and standards in authorizing PwC's consent to incorporate its previously issued 2007 audit report in ArthroCare's June 2008 Form S-8 registration statement without first completing a reasonable subsequent events investigation.

The Board found that when Stone authorized PwC's consent, he was aware of new allegations of impropriety concerning ArthroCare's relationship with DiscoCare in 2007, and he knew that ArthroCare and PwC were continuing to assess those allegations.

PCAOB Release No. 105-2014-007, Order Making Findings and Imposing Sanctions In the Matter of Randall A. Stone, CPA, is available on the PCAOB website.

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PCAOB Enforcement staff members Mark Adler, Mark Porter, R. Davis Taylor, David Florenzo, Tina Bell, Michael Occhuizzo, Margaret Vizzi, and Mark Zebrowski conducted the investigation and litigation.

The PCAOB thanks the Securities and Exchange Commission, particularly its Fort Worth Regional Office, for its assistance in this matter.

Further information about the PCAOB Division of Enforcement and Investigations may be found on the PCAOB website. Suspected misconduct by auditors can be reported to the PCAOB Tip & Referral Center.