Valeant's Audit Cop Held Similar Post at a Firm Felled by Fraud

  • Provencio is accounting expert on board's Philidor task force
  • Investors want `squeaky clean' record, says governance expert

If there’s a problem at Valeant Pharmaceuticals International Inc., Norma Provencio is supposed to help get to the bottom of it.

Valeant’s board said in late October that Provencio and three other independent directors would conduct an internal inquiry after the stock plunged on questions about the company’s relationship to a mail-order pharmacy -- ties it has since severed. Provencio, who leads the Valeant board’s audit committee, brings to the inquiry considerable accounting expertise, with her biography on Valeant’s website listing decades at Arthur Andersen, KPMG and her own health-care consultancy.

Norma Provencio

Source: Valeant

One thing not presently mentioned in that bio: Provencio was previously a director of a publicly traded company that failed after the government cracked down on a half-decade of fraud beginning in 2005. She oversaw the company’s audit committee for two years, until shortly after she joined Valeant’s board in 2007.

The small company, which made heart monitors and went by names including Signalife Inc., was faulted for not having internal financial controls. Its sparse revenues were shown to be inflated in such ways as paying someone to fly to Tokyo to get a postmark on a fake order. One key figure was sentenced to 17 years in prison over what the U.S. ultimately called conspiracy to pump up the company’s shares.

A Valeant spokeswoman said on Provencio’s behalf that she had followed the criminal case and “believes that the matter was handled appropriately.” Provencio, who wasn’t accused of wrongdoing, didn’t respond to requests for comment about Signalife’s demise.

Blemish on Record

Several experts in accounting and corporate governance say Provencio’s time at Signalife is a blemish on her track record as an audit overseer and on the Valeant ad hoc board committee that’s entrusted with assuring investors that the $32 billion drug giant has sufficient controls in place.

“The most important purpose of ad hoc committees is to send a message to the world” that the board is taking concerns seriously to restore shaken investor confidence, said Nell Minow, who co-founded the Corporate Library, a consultant on company governance, and is now the vice chair at ValueEdge Advisors. “You want people who are absolutely and positively squeaky clean,” she said, adding of Provencio’s role: “This does not send that signal.”

In mid-October, Valeant disclosed that U.S. prosecutors had subpoenaed documents related to its drug pricing. A few days later, short-seller Andrew Left said the company essentially controlled Philidor Rx Services, the mail-order pharmacy that has since been cut off, and suggested there could be Enron-like irregularities in the arrangement. Valeant denied wrongdoing in a presentation on Oct. 26, announcing the ad hoc committee that would investigate the Philidor relationship and related matters.

Robert Monks, a corporate governance expert who founded Institutional Shareholder Services before starting ValueEdge, said he wouldn’t automatically consider Provencio unfit for the committee’s inquiries. But he would ask hard questions about her previous time at the defunct company before putting her in such a role. At a small company like Signalife, where Provencio led the audit committee, it’s hard to shake the feeling that “if she didn’t know, she should have known” about the serious lapses, Monks said.

Overwhelming Support

Provencio is an accomplished forensic accountant who has been confirmed each year to Valeant’s board with overwhelming shareholder support, said Laurie Little, a spokeswoman for the Laval, Quebec-based company, who responded on her behalf. She was vetted before joining the board of Valeant’s predecessor company, Little said, adding that the board has determined that her sophisticated industry experience and broad exposure to complex financial issues “qualify her to be a member of the board and the committees on which she sits.”

The ad hoc committee is chaired by Valeant’s lead outside director, Robert Ingram. Along with Provencio, the members are Colleen Goggins, who was a longtime Johnson & Johnson executive, and G. Mason Morfit, the president of ValueAct Capital, the company’s fifth-largest shareholder. The committee will be assisted by an outside lawyer, Mark Filip of Kirkland & Ellis.

Ingram didn’t respond to requests for comment. Valeant didn’t make him or other ad hoc committee members available for comment.

‘Totally’ On It

People who know Provencio, including Valeant’s chief executive officer, said she’s experienced and careful. Theo Melas-Kyriazi, a Valeant director for 12 years, described her as proactive and fiercely independent as a director, with a deep knowledge of financial reporting that keeps her “totally on top of her job.” Melas-Kyriazi, now chief financial officer of Levitronix Technologies, preceded Provencio as Valeant’s audit chairman and remains on the three-person committee.

“Signalife looks bad. But I know the person and I’ve worked with her for eight years. She’s extremely qualified to work with outside counsel,” said Melas-Kyriazi. “I’d have to think the circumstance is that she did not fail in her diligence and her duties, but that things were hidden from her.”

Stephen Staudenmeir, who worked with Provencio at Arthur Andersen and later at her consulting firm, Provencio Advisory Services, said clients trust her and rely on her advice. “She’s a very straight shooter and extremely honest,” he said.

Concern about Provencio’s affiliation with Signalife emerged in a late September blog post by John Hempton of Bronte Capital, a fund manager who takes short positions and has been critical of Valeant.

Andersen Collapse

A broader view of Provencio’s business experience emerges from a review of regulatory filings, online biographies and depositions and other documents from civil and criminal actions related to Signalife.

A native Californian, Provencio earned an accounting degree from Loyola Marymount University in 1979 and joined Arthur Andersen that summer. She was one of its top healthcare accountants and a partner in 2002, when Andersen collapsed over a scandal elsewhere at the firm. It was found guilty over its role in Enron’s audits, a conviction that was subsequently overturned.

It was at Andersen, in 1995, that Provencio met and did some business for a lawyer named Mitchell Stein. Several years later, Stein would bring her to Signalife -- as an early investor in company warrants, as an accounting consultant before the company’s public offering and, starting in mid-2005, as a director in charge of the board’s audit committee.

Stein, a major shareholder in Signalife and its outside lawyer, led a scheme that started in 2005 to falsify orders for the company’s heart monitor, fraudulently pumping up its shares, the government said. He and two others were convicted. Stein has filed a motion to appeal his conviction.

At the time Provencio was overseeing Signalife’s audit committee, the company had about a dozen employees and few orders, according to court documents. In 2006, it reported just $190,000 in sales -- much of which the Securities and Exchange Commission said had been paid for by Stein, who concealed the fact from company auditors and officers. Stein was ultimately ordered to pay more than $11 million in a civil suit brought by the SEC. The company collapsed in 2012 and consented, two years later, to SEC restraints without admitting or denying wrongdoing.

Signalife and its successor, Heart Tronics, had “no written accounting procedures” from 2006 to 2008, the SEC said in its complaint. The perpetrators were able to “circumvent the entire system of accounting controls, to the extent any existed,” the securities regulator said.

‘Person to Blame’

When there are problems with a company’s financial controls, investors typically focus on the audit committee and its leader, said Alexander Dyck, a professor of finance and economics at University of Toronto. “If they’re going to look for one person to blame, it’s the chair,” he said.

After Provencio left Signalife’s board in June 2007, she worked as a consultant to the company, according to regulatory filings. In that role, she raised concerns with two executives about sales invoices whose numbers seemed off, according to a summary of an interview she gave in 2013 to Justice Department, SEC and U.S. Postal Service officials investigating Stein. She looked online for the purported purchaser and couldn’t find it, according to the summary, which added that the executives never got back to her.

At Valeant, Provencio and the rest of the ad hoc committee are now tasked with digging through records of one of the industry’s most complex companies, the product of dozens of acquisitions totaling more than $34 billion. Valeant hasn’t said when the committee will present its findings. As short-sellers continue to ask questions about its operations, Valeant will hold an investor day on Dec. 16, blocking out more than four hours to discuss its operations and address questions.