1. Explain the Phar-Mor fraud.
Phar-Mor was a discount drug retail chain, based in Youngstown, Ohio. It was founded by Michael Monus and David Shapira in 1982. Monus and company’s CFO Patrick Finn moved about 10 million from Phar-Mor to the World Basketball League to cover up losses. The senior management had cumulatively overstated income by $290 million from 1987 to 1991. The fraud made by dumpling the losses into a “bucket account” and then reallocating the sums to one of the company’s hundreds of stores in the form of increases in inventory amount. What is more, Phar-Mor issued fake invoices and made phony journal entries to decrease cost of sales and increase inventory.

2. Explain how the 4 components of the fraud diamond apply to this fraud.
Incentive: Monus couldn’t face the situation of his growth-company suddenly going down. Finn believed in Monus’ ability to change things around so he decided to work along with the fraud. …show more content…
Finn was the chief financial officer of Phar-Mor from 1988 to 1992. Finn initially brought Monus the bad news that following a number of years of eroding profits, the company faced millions in losses in 1989.
Rationalization: The rationalization was that all the misrepresentation was short-term so that the company could recover losses and make the reported financial statements correct.

Capability: All of these involved fraudsters are senior management. They all have enough influence in company’s operation and financial statements. Finn prepared the reports and Monus changed the numbers of four months before turning the task over to Finn. These reports with the false number were faxed to Shapira and given to Phar-Mor’s board.

3. How come the fraud went undetected for so