...Making Phar-Mor, Phar-Less Phar-Mor was a private company that was in the super-giant drug chain business. It had achieved exponential growth and was already being compared to Wal-Mart as one of the great American success stories. The company had grown in just seven years (1985-1992) from just a few stores to hundreds. Sales went from literally nothing to over $3 billion. The founders had become pillars of their communities owning sports teams and contributing substantially to local charities. Ultimately it turned out that the company was engaged in a massive fraud with literally all senior management involved in funneling misinformation to investors. Those personnel including the president and Chief Operating Officer, Mickey Monus, the CFO and all of the internal audit staff, misinformation was also given to the accountants, the creditors and debt holders as well as everyone else in the outside world that had anything to do with the financial side of Phar-Mor. Class action lawsuits were filed against the company by investors and ([127]) creditors while the accountants, Coopers and Lybrand were named under the Federal anti-fraud provisions of section 10b of the Securities Exchange Act and additional actions were commenced by the State of Pennsylvania under their statutes. The company went under in one of the biggest bankruptcies in U.S. history of a private company. Five hundred million was lost by debt-holders and creditors, management was assessed a total of $1 million...
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...Summary: The Case of Phar-Mor Inc. The Phar-Mor Inc. a deep discount drug store chain, came into existence in 1982 as an affiliate of family-owned grocery chain Giant Eagle, which also owned a distribution company, Tamco Distributors Co. and the deep discount concept consisted of using “power buying” or purchasing the largest possible amount of product at best term, then selling at discounts of up to 25% - 40% off retail prices. Phar-Mor Inc. had fictitious inventory, fund diversions and a fraud cover-up by management which costed its investors 500 million dollars. The first indication of financial problem came to light in 1988, when investigation of lower-than-expected profit margins revealed that Phar-Mor was being billed for inventory it had not received from its sister company, Tamco, a primary supplier. The receiving records had not been maintained by Phar-Mor for the purchases made from Tamco. And this led to the difficulty of substantiating products received. The analysis of this shortage by Phar-Mor accountant indicated that the inventory shortage or overbilling was around 4 million dollars. However, a settlement had been made by the two subsidiaries of Giant eagle for an amount of $7,000,000 giving Phar-Mor $2,000,000 profit for the year and this resulted in a nearly identical gross margin as prior year. In addition to this, another source of problems for Phar-Mor had began with the formation of the World Basketball League (WBL) in 1987 which led for the embezzlement...
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...Phar-Mor Case 4.6 Questions 1. a) By hiring a member of its external audit team a company could gain insight into the auditor’s process and better devise methods of hiding fraud. b) Hiring a former auditor would greatly compromise and possibly impair the existing external auditor’s ability to remain independent. On top of having knowledge about the auditor’s practice, preexisting relationships could cause bias in the audit outcome. c) Sarbanes-Oxley Act 2002 limits the ability of corporations to hire employees of their external audit firms. Sox requires a “cooling-off” period of one year, after the audit commencement date, before a member of the auditing team can begin work in a key position with the client. d) It is not appropriate for auditors to trust executives of a client. AU section 230, auditors should exercise “due professional care in the performance of work”, hence apply professional skepticism. The auditor should be impartial to the level of management’s honesty and pursue factual evidence to support findings and conclusions. 2. a) The client can be in a more powerful position than the auditor in the auditor-client relationship if the auditor is trying to sell the client additional services. b) SOX prohibits external auditors from providing certain services to clients including: • bookkeeping or other services relating to the accounting records or financial statements of the audit client; • financial information systems design and implementation;...
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...Phar-Mor Inc., a deep discount drugstore chain, was founded in 1982 by Michael J. “Mickey” Monus, who was a vice-president of Tamco Distributors Co. By 1992, Phar-Mor have 310 outlets and 20,000 employees in 34 states. Phar-Mor went into bankruptcy in 1992 due to fraudulent activities, which had caused its investors over $500 million dollars. The Sarbanes-Oxley Act of 2002 (SOX) could have prevented the bankruptcy if it had been in effect and was able to be applied to Phar-Mor Inc. The fraudulent activities of Phar-Mor Inc. consist of fictitious inventory that were used to cover up operating losses, the president Michael Monus’s personal expenses and World Basketball League expenses paid by Phar-Mor Inc. were charged in bucket accounts that were allocated to inventory at the year end. Those that took part of the fraud consists of Michael Monus, the president; Patrick Finn, the chief financial officer; Jeffrey Walley, vice president of finance; Stanley Cherelstein, the controller; and John Anderson, the accounting manager. Finn, Walley and Cherelstein are all former auditors of the accounting firm, Coopers & Lybrand, which performs audit services for Phar-Mor Inc. There are five specific sections of SOX that could have prevented the Phar-Mor fraud. These five sections are: Title II, section 203, “Audit Partner Rotation.”; Title II, section 206, “Conflicts of Interest.”; Title III, section 302, “Corporate Responsibility for Financial Reports.”; Title IV, section 404, “Management...
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...Case 4.6 Phar-Mor, Inc. 6. A) Other high profile cases where a company has committed fraud by misstating inventory include Comptronix Corporation and Bristol-Meyers Squibb Company. B) It is particularly difficult to detect intentional misstatements of inventory because manual checks of inventory only occur semi-annually, management’s ability to alter these checks, and the cheer ability to miscount items due to sheer volume. Phar-Mor was capable of misleading their external auditors because the auditors of a retail store are not required to physically examine the inventory in each store. The auditing firm only examined inventory in four of the one hundred and twenty nine stores that existed. Phar-Mor also knew in advance which locations were going to be audited which allowed them to be able to fool Coopers & Lybrand for several years. C) Audit procedures such as implementing additional random visits to Phar-Mor stores to examine inventory, verifying shipments from suppliers and conducting an inquiry of individual store management could have helped prevent or detect the overstatement of inventory. 7. A) Factors that would have contributed to a high inherent risk assessment of Phar-Mor include their excessive growth in a highly competitive market, the motivation from management to maintain that growth, rapid expansion, results from previous audits, their involvement with related parties, inventory being their biggest account, and the random, flamboyant behavior of...
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...Phar-Mor, Inc. Key Facts • Started in 1982 with 1 store. Up to 310 stores in 1992 with sales of $3 billion • Retail drug store- highly competitive, deep discounts • Mickey Monus, president and COO, found guilty of embezzling $10 million in 1995 • Monus had an extravagant life style • Sentenced to 20 years in prison • Monus and Patrick Finn his CFO • Manipulated I.S. accounts (understate cost of goods sold and overstated inventory) for 6 years • Inventory went from $11 million in 1989 to $153 million in 1991!! • Investors lost over $1.1 billion after Stk. Equity overstated by $500 million. • Problems: Poor MIS, poor internal control (bypass accounts payable controls by having a supply of blank checks), hands off management style of CFO, inadequate internal auditing, collusion among upper management, and existence of related parties • Fraud team included several former auditors from C & L who knew what the auditors were looking for and were thus able to hide the fraud • Fraud was discovered when a travel agent received a Phar-Mor check for World Basketball League expenses and signed by Monus (Monus was the founder of the World Basketball League) • Travel agent showed check to her landlord who was a Phar-Mor investor. Landlord called Phar-Mor CEO • Fraud resulted in the closing of 200 stores, laying off of 16,000 employees, and filing for bankruptcy • Emerged from bankruptcy. Now 106 stores in 19...
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...Fraud Case on Phar-Mor, Inc. Introduction Phar-Mor, Inc. was one of the top ten deep discount store that grew rapidly in a short period of time during the 1980s. Phar-Mor pricing strategy was to sell products at an even greater discount than other deep discount stores like Wal-Mart. While the practice of selling at such low cost attract customers, Phar-Mor was experiencing losses. The prices were cut so low that profit would not be generated. And this was how the fraud began. To prevent the truth from damaging Phar-Mor’s appearance, the president and other top management employees decided to cook the books by using creative accounting practices that were against the rules of GAAP and GAAS. Other than that, there was also an embezzlement of cash by the president and CFO of Phar-Mor. When the fraud was finally uncovered, investors have lost over one billion dollars, and the fraud was estimated to be over $500 million. Soon afterwards, Phar-Mor had to file for bankruptcy. By the end of the month, Phar-Mor had to lay off over 10,000 of their employees and close over 100 of their stores all across the state. Several charges were filed against Phar-Mor’s top executives and auditors. By the end of the trial, the financial statement fraud that occurred in Phar-Mor was deemed to be one of the largest corporate scandal recorded in history. Background The first Phar-Mor store was opened in Cleveland by Mickey Monus in 1982. According to JRO, Monus was the son of a businessman and...
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...ACCT 4304, Fall 2014 Audit case Read the attached audit case and answer all the questions that follow. A total of 90 points are available for the actual responses to the questions and 10 points are available for presentation, clarity and grammar. Total points for the assignment are 100. Note: Answer the questions as comprehensively as possible. Reference to Auditing Standards, your textbook, and other relevant authoritative sources is expected where appropriate. Even where some of the questions are quite general, try as much as possible to relate your answer to the case. 1. Some of the members of Phar-Mor's financial management team were former auditors for Coopers & Lybrand. (a) Why would a company want to hire a member of its external audit team? (3pts) (b) If the client has hired former auditors, would this affect the independence of the existing external auditors? Explain. (3pts) (c) How did the Sarbanes-Oxley Act of 2002 and related rulings by the PCAOB, SEC or AICPA affect a public company's ability to hire members of its external audit team? (3pts) 2 (a) What factors in the auditor-client relationship can put the client in a more powerful position than the auditor? (3pts) (b) What measures has and/or can the profession take to reduce the potential consequences of this power imbalance? (3pts) (c) Do you believe that in this Phar-Mor Case there was some power imbalance between the Coopers and Phar-Mor? Explain. (3pts) 3. (a) Is it appropriate for...
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...ACCT 4304, Fall 2014 Audit case Read the attached audit case and answer all the questions that follow. A total of 90 points are available for the actual responses to the questions and 10 points are available for presentation, clarity and grammar. Total points for the assignment are 100. Note: Answer the questions as comprehensively as possible. Reference to Auditing Standards, your textbook, and other relevant authoritative sources is expected where appropriate. Even where some of the questions are quite general, try as much as possible to relate your answer to the case. 1. Some of the members of Phar-Mor's financial management team were former auditors for Coopers & Lybrand. (a) Why would a company want to hire a member of its external audit team? (3pts) (b) If the client has hired former auditors, would this affect the independence of the existing external auditors? Explain. (3pts) (c) How did the Sarbanes-Oxley Act of 2002 and related rulings by the PCAOB, SEC or AICPA affect a public company's ability to hire members of its external audit team? (3pts) 2 (a) What factors in the auditor-client relationship can put the client in a more powerful position than the auditor? (3pts) A) A client can be put in a more powerful position than the auditor in an auditor-client relationship if the auditor is trying to sell the client additional services. When an auditor is trying to preserve the relationship with the client in order to get more business revenue, this...
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...What the Jury Heard in the PharMor Case 1 In the Phar‐Mor case, several members of top management confessed to, and were convicted of, financial statement fraud. Certain of Phar‐Mor’s creditors and investors subsequently brought suit against Phar‐Mor’s independent auditor, Coopers & Lybrand, alleging the firm was reckless in performing its audits. A jury found the audit firm liable for fraud. While this module can only contain a very small portion of what the jury heard in the five‐month trial, we identify the most important points presented to the jury through a careful review of the trial transcripts and selected interviews with attorneys who were in the courtroom on a daily basis. Unless otherwise noted, all facts and statements are based on actual trial transcripts. Background The $500 million accounting fraud at Phar‐Mor, Inc., led to the bankruptcy of one of the largest private companies in the United States in 1992. As a result of the company’s fraud and subsequent failure, charges were filed against both Phar‐Mor’s management and the company’s auditors. Phar‐Mor’s former management was collectively fined just over $1 million, and two former members of Phar‐Mor management received prison sentences. The company’s former auditors, Coopers & Lybrand LLP (Coopers), faced claims of more than $1 billion, although final settlements were a small fraction of that amount. Even though Phar‐Mor’s management, the plaintiffs’ attorneys, or anyone else associated with the case never ...
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...ACCT 4304, Fall 2015 Audit case Read the attached audit case and answer all the questions that follow. A total of 90 points are available for the actual responses to the questions and 10 points are available for presentation, clarity and grammar. Total points for the assignment are 100. Note: Answer the questions as comprehensively as possible. Reference to Auditing Standards, your textbook, and other relevant authoritative sources is expected where appropriate. Even where some of the questions are quite general, try as much as possible to relate your answer to the case. 1. Some of the members of Phar-Mor's financial management team were former auditors for Coopers & Lybrand. (a) Why would a company want to hire a member of its external audit team? (3pts) (b) If the client has hired former auditors, would this affect the independence of the existing external auditors? Explain. (3pts) (c) How did the Sarbanes-Oxley Act of 2002 and related rulings by the PCAOB, SEC or AICPA affect a public company's ability to hire members of its external audit team? (3pts) 2 (a) What factors in the auditor-client relationship can put the client in a more powerful position than the auditor? (3pts) (b) What measures has and/or can the profession take to reduce the potential consequences of this power imbalance? (3pts) (c) Do you believe that in this Phar-Mor Case there was some power imbalance between the Coopers and Phar-Mor? Explain. (3pts) 3. (a) Is it appropriate for...
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...Case 2-8 Juggyfroot This case shows the auditors resisting pressure from the client to change to a non justified accounting treatment. The stakeholders of this case are the bank, the shareholders, creditors, suppliers, employees, and officers of the firm. The stakeholders expect non-misleading financial statements. Deziloo has an obligation to perform the audit with integrity, objectivity, and due professional care. From a rights perspective, it is not right to mislead the investors by making it look as though the company is doing better than it really is. Any attempt to intentionally misstate the financial statements violates the categorical imperative. From a justice perspective, stakeholder interests are not fairly represented because the perceived interests of the management are given priority over the interest of all other stakeholders. From a utilitarian perspective, Rule-utilitarianism requires that the correct rule should be followed. Act-utilitarianism requires that the act that creates the greatest good for the greatest number of stakeholders should be selected. None of the stakeholders benefit from an action that misstates net income. From a virtue perspective, honesty requires that the statements should be truthful and recognize revenue using generally accepted accounting principles. Objectivity requires that the company should approach its decision about the proper asset classification with fair-mindedness and without partially to one set of stakeholders....
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...The Case of Phar Mor Inc. Sara Munger ACCT 525: Current Issues in Accounting Professor: Sharon Brown July 12, 2014 The Case of Phar Mor Inc. Fraud will always be an issue but was more so in the past before there were any real guidelines that companies and accountants had to adhere to. People with higher positions within a company somehow let the power get to them at times and can use that to their advantage. Rather than taking that position and being responsible and set the proper example some set the wrong example. The Sarbanes-Oxley Act set standards to try to prevent future scandals like Phar Mor Inc., the Waste Management scandal and Enron. Sarbanes-Oxley (SOX) was created after several major scandals that shook the world. These scandals made it clear that preventative measures needed to be taken in order to prevent any future scandals. Too many people/companies now believed that they were able to get away with fraud and it was acceptable as long as they did not get caught. This gave other employees the idea that this was acceptable behavior and needed to be stopped because it was affecting many people. The Phar Mor Inc. scandal had so many people involved that I am not sure as to whether or not it could have been prevented. An investigation revealed that Phar Mor was not receiving all of the inventory they were being billed for by their sister company Tamco. Phar Mor’s profit margins were suffering due to the missing inventory because they were...
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...Current Issues in Accounting The case of Phar-Mor Inc is new to me after coming across a number of scandals and I am excited to do research on it. Phar-Mor Inc is a deep discount drug store that was established in 1982. The business model was to by huge masses of products or alternatively called “power buying” and selling them at a huge discount of 25 to 40% of retail price (Lansing, 2011). In 2002, the corporation had 310 outlets with 25,000 employees in majority of the states, 34 to be precise. The problem was first discovered through misleading information concerning reporting inventories. Another problem was through the CEO Monus, who owned at least 60% of the 10 teams of the Worlds Basket Ball Leagues. It is a problem because the CEO was estimated to have embezzled $15 million in the corporation’s assets to support the teams. There are a number of other fraudulent factors involved that have increased the amount of fraud to 500 million! If SOX was enacted in 1992, then it would have helped in the following manner: Section 203, Audit Partner Rotation: “The new rules impose more rigorous standards of independence for the external auditors of SEC reporting companies (including foreign private issuers) than under existing SEC rules that existed” at the time of the Phar-Mor Inc scandal( Lansing, 2011 ). This also required more frequent partner rotation off an audit engagement team. If Coopers and Lybrand were not auditing Phar-Mor Inc on a continuous basis, meaning for...
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...accounting fraud and auditor legal liability c a S eS inc lu de d in t hiS Se ction 4 89 99 4.1 Enron Corporation and Andersen, LLP Analyzing the Fall of Two Giants . . . . . . . . . . . 4.2 Comptronix Corporation 4.3 Cendant Corporation . . . . . . . . . . . . . . . . . . . . . . Identifying Inherent Risk and Control Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . 111 119 127 137 Assessing the Control Environment and Evaluating Risk of Financial Statement Fraud . . . . . . . . . . . . . . . . . . . . . . 4.4 Waste Management, Inc. 4.5 Xerox Corporation 4.6 Phar-Mor, Inc. Manipulating Accounting Estimates . . . . . . . . . . . . . . . . . . . . . . . . . . Evaluating Risk of Financial Statement Fraud . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounting Fraud, Litigation, and Auditor Liability instructor resource Manual — do not coPy or redistribute instructor resource Manual — do not coPy or redistribute enron corporation and andersen, llP analyzing the fall of two giants inS tr uc t ional o b je c t ive S [1] c a s e 4.1 Mark S. Beasley · Frank A. Buckless · Steven M. Glover · Douglas F. Prawitt [2] [3] To help students understand what happened at Enron Corporation and how Andersen’s involvement with Enron led to the accounting firm’s downfall. To enhance students’ appreciation of the importance of understanding an audit client’s core business strategies. To develop students’...
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