6. A. Two companies that have committed fraud by misstating inventory are Bristol-Myers Squibb Company, who concealed excess inventory held by wholesalers, and Leslie Fay Women’s Apparel whose controller increased orders by counting items shipped but did not subtract returns
B. Intentional misstatements of inventory are difficult to detect primarily because accounting for inventory itself is difficult. It is nearly impossible to take stock of every inventory item a company has while doing an audit report. You need to sample portions of inventory and records and rely on what you find in those samples to determine accuracy of the remaining records. Phar-Mor was able to fool their accountants, Coopers and Lybrand, for several years about their inventory because they lacked integrity. The company’s MIS was inadequate and when asked about bettering it, senior officials shot the idea down because they wanted the fraud to go undetected. The internal controls were poor and Phar-Mor employees were able to bypass areas that should have had controls on them. The management and internal audit functions were not performing to the best of their ability. Michael Monus, the head of the fraud scheme and the company, was a member of the audit committee and was able to destroy the committee when he found out they may investigate certain abnormal behavior. Phar-Mor’s upper management was involved in the scheme and was able to convince the auditors that certain aspects where true and the auditors trusted them to be honest. The actual fraud team was made up of accountants and former auditors so they knew what they were doing and knew exactly how best to make it go unnoticed. Lastly, Phar-Mor set up a great deal of related party companies and when looking at how all these companies came together, detection of fraud was nearly impossible.
C. Companies should have internal controls set in