Merck's $14bn accounting error

WALL Street was hit by a fresh accounting controversy today as drugs maker Merck revealed it had booked $14bn (£9.1bn) of sales it never actually received. The admission by Merck, one of the 30 blue-chip companies in the Dow Jones Industrial Average, follows accounting irregularities at Enron, WorldCom and Xerox and is set to heighten investor suspicions about the reliability of company accounts.

Merck, which was audited by Andersen until March this year, made the admission in a filing to the Securities and Exchange Commission.

Its Medco division, which manages drug benefit programmes for businesses and health insurers, included in its sales line prescription payments made by consumers directly to pharmacies. The money - millions of small payments typically of $10 or $15 a time - never went anywhere near Medco, which also recorded equivalent amounts as costs so there was no impact on profits.

The payments were $2.8bn in 1999, $4bn in 2000, $5.5bn last year and $1.6bn in the first quarter of this year, Medco said. The accounting practice itself was originally reported in an SEC filing in April. But this is the first time Merck has put a figure on the extent of it.

Some shareholders are already suing Merck, claiming they were duped into thinking the company was doing better than it really was. It maintains that the practice was in accordance with standard accounting rules.

This is the first time Merck has put a figure on its extent. Merck maintains the practice was in accordance with standard accounting rules. Its shares fell $2.88 to $45.98.