Phar Mor Case

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~ Case 6 Phar-Mor, Inc.: Accounting Fraud, Litigation, and Auditor Liability Mark S. Beasley, Frank A. Buckless, Steven M. Glover, Douglas F. Prawitt LEARNING OBJECTIVES After completing and discussing this case, you should be able to . . Identify factors contributing to an environment conducive to accounting fraud . Understand what factors may inappropriately influence the client-auditor relationship and auditor independence Understand auditor legal liability issues related to suits brought by plaintiffs under both statutory and COmmonlaw INTRODUCTION In December 1995, the flamboyant entrepreneur Michael "Mickey" Monus, formerly president and chief operating officer (COO) of the deep-discount retail chain PharMor, Inc., was…show more content…
Phar-Mor's prices were so low that competitors wondered how Phar-Mor could do it. Monus' strategy was to underse11Wal-Mart in each market where the two retailers directly competed. Unfortunately, Phar-Mor's prices were so low that Phar-Mor began losing money. Unwi11ingto a11owthese shortfa11sto damage Phar-Mor's appearance of success, Monus and his team began to engage in creative accounting so that PharMor never reported these losses in its financial statements. Federal fraud examiners discerned later that 1987 was the last year Phar-Mor actua11ymade a profit. Investors, relying upon these erroneous financial statements, saw Phar-Mor as an opportunity to cash in on the retailing craze. Among the big investors were Westinghouse Credit Corp., Sears Roebuck & Co., ma11developer Edward J. de Bartolo, and the prestigious Lazard Freres & Co. Corporate Partners Investment Fund. Prosecutors say banks and investors put $1.14 biUion into Phar-Mor based on the phony records. The fraud was ultimately uncovered when a travel agent received a Phar-Mor check signed by Monus paying for expenses that were unrelated to Phar-Mor. The agent showed the check to her landlord, who happened to be a Phar-Mor investor, IUnless otherwise noted, the facts and statements included in this case are based on actual trial transcripts. Case 6 - Phar-Mor, Inc.: Accounting Fraud, Litigation, and Auditor Liability and he contacted Phar-Mor's chief

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