Becton Dickinson's Alaris infusion pumps — the devices hospitals use to deliver IV medications — had a known defect that would require a recall and remediation. Under GAAP, the estimated cost should have been recorded as a loss contingency when it became probable and estimable. In the fourth quarter of fiscal 2019, BD did not record roughly $50 million in probable recall costs, overstating that quarter's operating income by 82 percent.
In its FY2019 annual report, BD failed to record or disclose approximately $59 million in estimated recall and remediation costs, overstating annual income before taxes by more than 5 percent. The SEC found violations of the books-and-records, internal-controls, disclosure-controls and antifraud provisions of the securities laws.
In December 2024 BD agreed to pay a $175 million civil penalty and retain an independent compliance consultant to review its recall accounting and disclosure controls. It was the largest SEC penalty for a recall-accounting failure.
BD failed to book $59M in probable recall costs, inflating income; SEC fined $175M, the largest penalty for recall-accounting failure.
A recall cost is a visible hit to earnings, and the accounting rule that requires booking it is also the rule that makes the quarter look worse.
The pumps were still being sold, so acknowledging the recall meant acknowledging a product failure while the product was still in the market.
Disclosure controls failed because the people who knew the recall was probable were not the people who prepared the financial statements.
A recall cost that is probable and estimable belongs in the financial statements the day it meets that test — delaying it does not make it go away, it makes the restatement worse.
FOLLOW THE EVIDENCE