Case Study : Phar Mor 's Assets

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Executives misappropriated Phar-Mor’s assets, directing over $10 million to Monus’s now defunct World Basketball League (WBL). With the league failing and fan attendance dwindling, Monus was forced to use Phar-Mor funds to cover numerous WBL expenses. When a Phar-Mor check was sent directly to a WBL vendor, the fraud began to unravel. CEO David Shapira announced the fraud in
August 1992.
Phar-Mor maintained 91 related parties, as identified after the fraud. These related parties; many set up in a network by Shapira and Monus, created a complex situation that Coopers & Lybrand (Coopers) would later claim prevented them from detecting the fraud. Notably, a highly material settlement with Tamco, a related party, over inventory shortages was largely ignored. The auditors should have performed a review for related-party transactions at year-end that may have uncovered some of the transactions.
Inadequate disclosure of related-party transactions is one of the most serious of financial statement frauds. It is also one of the most difficult to detect.
Phar-Mor easily skirted the annual audit by Coopers. The Coopers partner leading the audit had previously came under scrutiny for missing audit budgets, and thus, was under increased pressure to maintain audit costs. Continuing, the fact that Monus was likely to contribute additional business to the accounting firm led to a desire to please him. Eager to cut costs and in the first year of their engagement,
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