WASHINGTON (Reuters) - Some major U.S. drug companies have hired their own auditors to perform compliance reviews mandated in government settlements over alleged civil violations, such as paying kickbacks or off-label drug promotion, according to federal records reviewed by Reuters.
Third-party compliance reviews are playing an increasingly large role in helping the government ensure companies fulfill their obligations in federal settlements.
But unlike the Justice Department or the Securities and Exchange Commission, the Department of Health and Human Services inspector general does not prohibit companies from hiring firms with whom they have existing business ties.
Some lawmakers and legal experts say that practice creates conflicts of interest and could impair outside reviewers’ independence.
“If the goal of this whole thing is to have an energetic and independent reviewer ferreting out mistakes and potential fraud within the company, do not put them under the financial thumb of the people who have millions of dollars at stake in keeping the audit work,” said Kevin Outterson, a professor of health and corporate law at Boston University.
Several large drug makers - including Novartis, GlaxoSmithKline, Merck, Sanofi and Allergan Inc. - have relied on their existing or previous auditors, PricewaterhouseCoopers (PwC) or Ernst & Young (EY), to also serve as compliance reviewers, according to corporate filings and a list of reviewers.
The health agency’s inspector general provided the list of reviewers hired by drug companies in response to a Reuters Freedom of Information Act request.
The inspector general typically settles civil claims through the use of a “corporate integrity agreement” mandating various reforms.
These five-year deals often require the hiring of an independent compliance consultant known as an “independent review organization,” which is tasked with reviewing internal policies and data, such as payments to doctors.
In exchange, the inspector general’s office agrees not to exclude a company from participating in Medicaid and Medicare.
Susan Gillin, an attorney in the inspector general’s office, said she agreed that “theoretically, a potential conflict of interest exists.”
But she said her agency has not observed any problems with weak oversight by auditors serving in dual roles. Such arrangements are allowed, she said, as long as the firm is not involved in corporate management or advising on policies it will also review.
“We have very few repeat parties to corporate integrity agreements,” she said.
While some companies have had multiple settlements over the years, they typically cover different alleged violations, or conduct committed by companies that, between settlements, became part of a different firm through an acquisition, Gillin said.
Spokespeople for Novartis, Merck, GlaxoSmithKline and Sanofi all said they disclosed their business relationships to the inspector general, which reviewed them. A spokesman for Allergan Plc. said the arrangement predated the company’s acquisition by Actavis in March 2015.
Executives at PwC and Ernst & Young told Reuters they believe their dual work auditing and conducting compliance reviews are not in conflict and that they comply with all applicable regulations.
The compliance reviewers “are independent in fact and in appearance,” said EY Vice Chair Ron Hauben.
Nancy Beacham, a partner at PwC, said the firm adheres to federal standards for all public company auditing engagements.
“We abide by the rules of what we can and cannot do,” she said.
Some legal experts who see a conflict in the dual role say it can be exacerbated by the fact that accounting firms are generally paid more for their audit work than for these sorts of compliance reviews.
For example, prior to Allergan Inc’s acquisition by Actavis in March 2015, the company disclosed that in fiscal year 2012, it paid Ernst & Young more than $5 million in audit fees, compared with more than $440,000 it paid the firm for compliance work performed under the corporate integrity agreement.
“Work with a major company is an important contract, and an established contractor isn’t going to be independent,” said Brandon Garrett, a professor at the University of Virginia School of Law.
Senate Judiciary Chairman Charles Grassley, an Iowa Republican, said such arrangements could weaken enforcement.
“If the firms enforcing the agreements aren’t independent,” he told Reuters in a statement, that “defeats the purpose of the agreements.”
While some companies hire their auditors as reviewers, the majority of the more than two dozen public companies reviewed by Reuters that have or had corporate integrity agreements - such as Pfizer, CVS Caremark and Eli Lilly - do not hire their own auditors and instead opt for consulting or law firms.
Pricewaterhouse’s current dual clients for audits and compliance reviews include Novartis and Merck, according to the list provided by the health agency’s inspector general.
GlaxoSmithKline previously engaged its auditor, PwC, for a compliance review which ended in 2012.
EY currently performs dual work for Sanofi and it previously did dual work for Allergan Inc. prior to its acquisition.
GlaxoSmithKine, Novartis and Merck have all been involved in multiple settlements with the U.S. government since 1991 to resolve a range of criminal and civil claims, according to a recent report by the nonprofit watchdog Public Citizen. [ID: nL2N17122L]
GlaxoSmithKline has paid nearly $8 billion in federal fines between 1991 and 2015 - the most of any drugmaker, according to the Public Citizen report.
A GlaxoSmithKline spokeswoman said the company has greatly improved its compliance by taking steps such as eliminating payments to doctors who speak on the company’s behalf and ending sales incentives based on prescription volumes.
Novartis, in 2010, settled civil charges of paying kickbacks to doctors who spoke at corporate events, and signed a corporate integrity agreement.
The company now faces another civil lawsuit filed by federal and state prosecutors, which alleges that kickbacks to doctors continued for nearly a year after it signed its 2010 corporate integrity agreement with the health agency’s inspector general.
Novartis has sought to dismiss the case, saying it makes “sweeping” allegations of a “decade-long, nationwide fraudulent scheme based on just fifteen doctors.”
Reporting by Sarah N. Lynch; Editing by Soyoung Kim and Brian Thevenot