Phar-Mor: Case Study

The case describes that, "...the accounting system could not be locked at the end of the month and there was no audit trail. Sachdeva and Mulvaney were thus able to make undetected post-closing changes to the books and bypass an internal control requiring Michael J. Koss to authorize those changes". These post-closing changes may be false entries done to hide theft during the accounting period. Further, because the reconciliations were done by the same people who initiated or recorded the transactions, the fraud could be covered up. For example, had one of them made an unauthorized purchase at a retail store where the expense were obviously not business related, they could have assigned the expense or expense description to a vendor where the transaction amount would have been normal. If the accounting system was not locked, they could have also just posted the transaction date back to a prior period that isn't likely to be reviewed.

In 1985, an attempt was made to falsify certain store inventories which was uncovered by the auditors. The auditors accepted an excuse that it was not sanctioned by management.

Control Activities: Control activities referred to the policies that ensured that the management directives were followed. As such, these directives were meant to ensure that the actions taken would have protected the firm against all forms of risks. However, when a firm control environment weakens the effectiveness of these policies, it follows that the firm weaken its control activities. As it was observable in Just for Feet case, the firm top management, most probably, used the control environment to influence the policies that allowed manipulation of its books through weakened verification controls, reconciliation controls and segregation of duties policies (Office Mental Health, 2015). These were some of the internal controls that would have detected the violation of accounting provision relating to recognition of unearned revenues, fictions assets and doubling of inventory. As such, undertaking a

The audit procedures that an auditor is supposed to perform are there to help protect from fraud that may occur. The falsification of inventory count sheets could have been prevented if the auditor would have verified the information that was on the sheets. Crazy Eddie executives were excellent at staying one step ahead of the auditor because they knew in advance which stores the auditors would visit, then they would ship merchandise to those specific stores.

a) The falsification of inventory count sheets: The auditors could have conducted full physical inventory counts, or performed random inventory counts at warehouses or stores undisclosed to the management at Crazy Eddie prior to the tests. This would have prevented the management from strategically shipping inventory from locations that were going to be audited to those where the misstatements would not be detected. Additionally, they could have preformed or observed random cycle counts. The fact that they switched from the

Predication: On 6/10/2016 Asset Protection Manager (APM) Jackie Mancino received an email through Point of Contact from Store Manager (MGR) Diana Zeman. MGR reported that Stock clerk Kenayata Legare (Subject) was incurring cash shortages on his register. MGR reviewed POS transactions, for transactions matching the shortage amount and determined that Subject was completing transactions for phone and gift cards and POS for himself with no customer present and not placing cash inside the register. CCTV video review for transactions processed on 6/4/2016 and 5/28/2016 done by APM Mancino confirmed these actions. Case was then reassigned to APM Jakub Orlando.

This essay explores the corporate collapse of Harris-Scarfe on April 3 2001, which before their collapse was Australia’s third largest retail group (Buchanan 2004, p. 55). It will explore the collapse in the context of the auditing framework. In particular, how the financial indiscretions were not discovered by the auditors, which were going on as early as six years prior to the collapse (Buchanan 2004, p. 62). To start with, we define what the auditing objective is in order to work out where it failed in this case. ASA 200.11/ISA 200.11 defines the auditing objective as one that needs to ascertain reasonable assurance that the financial report as a whole is free from misstatement, whether due to error or fraud. In doing so the auditor can give an opinion of whether the financial report was prepared in accordance with the financial reporting framework (Gay & Simnett 2012, p. 12).

The Company was a manufacturer of computer hard disk drives (Financial Executives Research Foundation, 2015) based in Longmont Colorado in 1989. The CEO, CFO and other members of management sought to defraud by managing earnings of the Company with fraudulent inventory, receivables and journal entries. The executives and management created boxes of inventory with bricks and scraps of metal for the auditors

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Phar-Mor was operated as an American discounted drug and variety store opening its first doors in Youngstown, Ohio in 1982. It came to be when the heir to Giant Eagle; David Shapira and the former Tamarkin VP Michael Monus established the well-known drug store. (Press 1996) Between the years 1985-1992 it expanded from 15 to 310 stores in 34 different states and the sales of the stores at hit virtually $1.5 billion dollars. The low priced drugs and all of the different locations of the stories were the reason the public was so attracted to the countrywide company. (Gilpin 1993) The five hundred million dollars in fraud led the company to bankruptcy. Top management and auditor members were convicted of the big scandal.

Predication: On 10/27/2016, Store Manger (MGR) Rajdavi Alexander contacted Point of Contact(POC) Asset Protection Manager (APM) Marry Cuestas and reported that she found a bag of merchandise with a receipt that did not match the contents in the bag. Upon further video review, MGR Alexander found that Shift Leader (SFL) Taquan Mouton brought up a bunch of items from the sales floor and placed them in the vicinity of Register 5. Service Clerk (SCA) Dominique Mathis rang up the transaction under mouton's cashier number and then conducted a transaction Void. A few transactions later SCA Martins rings only a portion of the previous items and places all of the items from the transaction valid into a bag and hands it off to SFL Mouton. On 10/27/16,

The Phar-Mor Inc. was founded 1982. The Phar-Mor company is located in about thirty-four states with at least 20,000 employees. However, in 1992 they had to file bankruptcy due to fraud one of the biggest cases before Enron. Phar-Mor Inc. consist of fictitious inventory that were used to cover up operation losses, personal expense that Monus’s used for his World Basketball League, but he hid them in the inventory expense account for several years. He had others to help him cover up the loss, such as, CFO, the Controller and Vice President as well as the accounting manager. So, this fraudulent activity of Phar-Mor was strictly top management that included the people who should have whistled blow the problem and that was the accounting firms, auditors but they helped Monus cover up the fraud for years that cause investors and employees over $500 million dollars.

A number of financial statement frauds went undetected from auditors in past and attracted a high profile attention. The businessmen add fake assets or transfer the assets of companies to their personal assets and result in accounting scandals when the affected companies are bankrupted or are even close of bankruptcy. Just to mention a few names, accounting scandals of Enron, AOL Time Warner and Xerox are among the hottest accounting scandals of the century. This means that despite presence of professional auditors accounting scandals happen and there is a need to learn from the mistakes of the auditors who overlooked these activities. In this report the case study of Xerox is analyzed in detail to highlight violations of accounting principles and present an example from which lessons can be learnt for the future.

The main issue in this case is that in the standard audit reports that go with the financial statements, “the auditor’s responsibility for detecting fraud is not discussed (Mancino, 1997)”. This is occurring because “auditors do not examine every transaction that happens or event and that would mean there is no guarantee that all material misstatements, whether caused by error or fraud could be detected (Mancino, 1997)”. There should be a spot on the audit report that states the auditor’s roles and their limitation into finding fraud. “There also seems to be some issues between the rules of the PCAOB has and the language that auditors use in their reports do not match (Holl, 2005)”. They should add a phrase to their audit reports that says it was either caused by error or fraud and to take accountability of knowing fraud had happen since it is the auditor’s job to show that the financial statements are free of material misstatements. Another reason this is occurring is the fact it is pretty much a pass or fail type of report it is not very detailed.

In the interview, Celine mentions that the company is lacking inventory control. There is no regular auditing in place to keep track of stocks. This practice is unacceptable. I recommend that the manager makes sure inventory is regularly checked. Businesses spend a great deal of time with tracking inventory. Even for a small company like AC Medical Supplies and Equipment there is a need for inventory control. Inventory management is considered a best practice in the business world. When a company does not audit its inventory, it is taking a gamble on unwanted risk. Some companies have experienced financial losses in the result of failed inventory controls.