Phar-Mor Fraud Essay

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Phar-Mor, Inc was a thriving discount grocery store in the late 1980’s. Phar-Mor was moving product quickly but profit margins were not significant enough to pay the bills. By the early 1990’s, Phar-Mor declared bankruptcy due to fraudulent financial reporting and misappropriation of assets, making it one of the largest frauds in U.S. history. Below, we will use auditing standard AU 316.85 Appendix A in conjunction with the video “How to Steal $500 million” to analyze how incentives/pressures, opportunities, and attitudes/rationalizations allowed for fraud to start and continue at Phar-Mor.

Annual reoccurring losses due to small margins put pressure on the CFO and controller to divide the overall loss
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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. Phar-Mor was a large grocery story and had thousands of inventory items on hand at each store which processed significant amounts of cash each day. The organizational structure of Phar-Mor allowed for inadequate and fraudulent recording keeping of assets as well as authorization and approval of purchasing transactions. Phar-Mor’s IT system of event logs was not robust enough to see which transactions had been modified, deleted or created, which allowed Phar-Mor to overstate the value of inventory.

Appendix A.2 also lists several factors that could provide opportunities for management/employees to commit fraud. One factor that could lead to fraud is if, “There is ineffective monitoring of management as a result of: domination of management by a single person or small group without compensating controls.” The auditors should have taken notice of the lack of controls and segregation of duties with respect to Phar-Mor’s

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