Tip of the Week: Proper Managerial Accounting Reduces Risks

Most readers likely understand some basic necessities for having a good accounting system in place. Independent pharmacy owners must know how to determine their cost of dispensing to evaluate the contractual terms offered them by a PBM or other third-party payer. They also know about using financial data to perform ratio analyses (liquidity ratios, profitability ratios, inventory ratios) that determine solvency, diagnose problems, and compare their pharmacy’s performance to other pharmacies as found in the National Community Pharmacists Association Digest. However, managerial accounting serves as a foundation for decision and operational procedures in every aspect of the business, including human resources management, marketing, financial investment of profits, evaluation of technology, and quality assurance programs. Accounting also ensures proper control, not only of inventory, but other processes that assure compliance with company policy, state board rules and regulations, narcotics counts, and other aspects of the business.

Researchers Ken Guo and Brenda Eshenbrenner authored a case study examining how CVS Pharmacy had to pay a $77.5 million fine for failure to implement necessary controls to comply with regulations that limited the sales of pseudoephedrine.1 As part of the government’s efforts to curb illicit production of methamphetamine, the Combat Methamphetamine Epidemic Act of 2005 (CMEA) was signed into law to limit sales of pseudoephedrine. Despite this, mid-2007 saw a surge of large-scale methamphetamine production in California as a result of “smurfing,” which occurs when multiple individual purchases of pseudoephedrine at quantities at or below legal limits are made in an attempt to avoid legal ramifications, and the purchases are combined together to produce methamphetamine.

An investigation by the DEA revealed that CVS had indeed implemented certain measures to comply with CMEA, such as physical control, a paper-based logbook, and an electronic logbook. CVS, however, did not adequately implement a component of that electronic logbook system called “Lookback,” which was designed to track and review customer purchases of pseudoephedrine that violated federal and state limits. CVS accepted responsibility, with conduct that admitted (1) employees at certain stores knowingly selling the drug over legal limits; (2) stores overselling the drug had reasonable knowledge that the drug would be used to make methamphetamine; and (3) the company’s distribution center was in a position to monitor and report excessive sales but failed to do so.

The authors analyzed the case in the framework of the Committee of Sponsoring Organizations (COSO) Internal Control–Integrated Framework for internal accounting controls and reporting. COSO involves a control environment (a commitment to appropriate accounting controls, with integrity, ethical values, and accountability for those responsible for oversight); risk assessment (the organization considers the potential for fraud and identifies changes that could impact the system of control; control activities (activities that mitigate risk and activities over technology that support the achievement of ethical organizational goals; information and communication (internally communicating information to support control; and monitoring activities (the organization selects, develops, and performs ongoing evaluations to ascertain whether the components of internal control are present and functioning).

In this case, proper accounting systems would have observed the abundance of sales in certain stores, even purchased at individually legal limits, and would have triggered an internal audit to put a quicker end to the ongoing smurfing practices. Pharmacy managers must be aware of proper and contemporary accounting systems and mechanisms to facilitate accounting that assist not only in daily decision-making but in operations control and risk management.

Additional information about Financial Reports and Risk Management in Contemporary Pharmacy Practice can be found in Pharmacy Management: Essentials for All Practice Settings, 5e.

About the Author

Shane P. Desselle, RPh, PhD, FAPhA, is a professor of social and behavioral pharmacy at the Touro University California College of Pharmacy.

Reference

Guo KH, Eschenbrenner BL. CVS Pharmacy: An instructional case of internal controls for regulatory compliance and IT risks. J Accounting Educ. 2018;42(2)17-26.