Phar Mor Case Study

The organizational structure of Phar-Mor was ineffective and lacked many control activities including: segregation of duties, authorization, documentary and IT controls. As a result, Phar-Mor’s president had a stronghold on certain upper level management and executives which gave him the opportunity to control the fraud and hide it from other members of the organization and supposedly Phar-Mor’s auditors, Coopers and Lybrand LLP.

The former CEO of DHBI, David Brooks ("DB"), misrepresented DHBI's financial statements, mislead the independent auditors in order to conceal his fraudulent transactions and he misappropriated DHBI's assets and funds for personal expenditures.

Founders Michael “Mickey” Monus and David Shapira perpetrated financial fraud because there was conflict of interest involved with Monus supporting a World Basketball League with Phar-Mor’s revenue. With the help of the Chief Financial Officer (CFO) Patrick “Pat” Finn $10 million was hidden in World Basketball League that Monus had founded. This was done by overstating the company’s inventory and earnings. Also, within 10 years of establishment Phar-Mor had grown to 300 stores and 25,000 employees which resulted in Phar-Mor having to borrow millions to fund this growth (Bloomberg Business.1992)

If board of directors decides to rectify previous frauds, they would investigate into the event, take appropriate legal action against people involved and disclose previous frauds with the previous and current year financial statements. If they decide to cover-up their fraudulent practices; they may warn me to stay out of this business or threaten to dismiss me. Both decisions would have differing effects on external stakeholders.

Professional auditing standards discuss the three key “conditions” that are typically present when a financial fraud occurs and identify a lengthy list of “fraud risk factors.”

After reviewing the financial information of the Tech Tennis, USA, there was a concerned due to some unusual changes in the company’s accounts. Financial statements play a crucial part in the determination of the progress of an organization. It assists the relevant personnel to identify whether the company is making profits or making losses. Although unethical, some companies will tend to deliberately misrepresent some of their financial statement information to create a false impression of the company’s success. There are various techniques that organizations utilize to manipulate their financial statements such as overstating their revenues (Bierstaker, Brody, & Pacini, 2006). In addition, some organization will tend to inflate their sales without considering their cash flow amount that the organization has acquired which will be a red flag to investigate. Consequently, financial statements provide vital information that helps both internal and external users to understand the position of the organization. Some companies in an attempt to continue in the market, they end up manipulating their financial statements that create an illusion of the success of the organization.

AICPA Code of Professional Conduct principles prevents vises such as fraud that are experienced in accountancy field. Audit is the best measure of the effect of the fraud that are imposed to investors by accountants. The relationship of the investors and account holders are supposed to be affirmed through auditing to ensure accounting principles are upheld(Weirich, Pearson, & Churyk, 2010). Improper loss of the funds through propagation of the accountant officer should be treated as fraud and criminal activity that should lead to prosecution. Therefore, the paper seeks to relate two fraud cases that have been audited and presenting AICPA Code of

In the case of Phar-Mor fraud, the company was involved in cover up and some accounts were created to hide the fraudulent activities. Bad inventory counts in the stores were made to help with the cover up and deceit about activities that cost hundreds of millions of dollars. (Williams, S.L., 2011)

Phar-Mor was a discount drug store chain that opened in Ohio and expanded up to

The auditing firm has been in engagement with the company throughout the period when the fraud was being committed. One of the common and clear indicators of possible fraud was the company’s cash flow statement. The company experienced positive growth in its profits from the year 1996 through to the year 1998. However, a close analysis of the cash flow statement shows that the company had experienced negative figures of cash flow from both operating and investing activities and positive cash flow from financing activities which would not sufficiently offset the negative cash flows from operating and investing. It is therefore evident

Phar-Mor was known as one of the major discount chain retailers in the late 1980’s - early 1990’s. It was founded by Mickey Monus, a gambler in nature, who with the help of senior management was “cooking the books” for years to cover up his loses. The reason why senior management agreed to do this fraud is the belief in unique ability of their leader to fix everything later on. This case is known as one of the biggest accounting frauds in the corporate history of the U.S. This paper will analyze who was affected by this fraud, the motives behind it and what systems of control failed to prevent it.

Fraudulent, erroneous, and illegal acts committed by a public company, usually at a managerial or executive level, have been a very serious problem for many years and have prompted development of strict and updated regulations, such as the Sarbanes-Oxley Act, in an attempt to prevent these occurrences. Unfortunately, these new or updated regulations are not enough to prevent these acts from happening, thus not alleviating the auditors of their responsibility to detect fraud. Some methods that management and auditors can employ to prevent and detect fraud, errors, and illegal acts are: improving knowledge, improving skills,

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.

Integrity might cause problems in this case as the main persons in this organization are family members and there are also family members with high functions in the bank and JRW Realty with which Prefab has close business relations. Moreover, the members of the audit and compensation committee are not all independent of the firm and therefore, the likelihood of fraud or material misstatements in the financial statements is quite high. The profitability of the engagement to the auditor should be considered as well. Due to the extensive investigation the auditor has to do, especially due to the relationships between the people at the top management and the independence of the audit and compensation committee, the profitability might be a concern. Furthermore, from the analysis of the business risks of accepting the audit it can be concluded that there are several severe problem areas in which fraud or material misstatements in the financial statements can take place. At the Prefab Sprout Company the risk of fraud or material misstatements is considered to be very high and therefore, the engagement should not be accepted.

The greatest opportunity for Minkow to commit fraud was ZZZZ Best’s lack of financial supervision. Lack of internal control facilitated manipulation of company’s assets and transactions. It gave the CFO the opportunity to falsify the documents and to create fictitious transactions. These transactions created formidable revenues on the company’s books and made it easy to borrow money from banks. The weak external audit was the other opportunity that allowed Minkow to commit fraud. The auditor was not familiar with the company and its related parties. In addition, the auditors placed too much trust in management produced documents and failed to verify key transactions. These two important reasons gave Minkow an opportunity to commit fraud.