Phar Mor Inc. : Overview

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 mission Statement for Waste Management Inc. is, “As North America’s leading provider of comprehensive waste management services, our mission is to maximize resource value while minimizing impact in order to further both economic and environmental sustainability for all of our stakeholders”. As one reads their mission statement, a picture of integrity, responsibility, and protection for all their community members comes to mind. Unfortunately, during the years between 1992 and 1997, WM’s management let their greed blind them to these commitments. At which time they started to make fraudulent inputs into the accounting books by inflating salvage values and extending the useful life of the garbage

Although the top level managers benefited in this situation, the shareholders suffered greatly. They lost a total of around $6 billion dollars in the market value of Waste Management’s stock. By the end of the scandal Waste

Without a question the BOD should have placed a high degree of reliance on Andersen, which at the time was one of the most prestigious worldwide accounting firms. The auditors should have known the kind of accounting taking place in Enron. In my opinion, Andersen knew, at least to some extent, the company’s financial condition. However, Enron was already too deep under water that blowing the whistle so late would have created problems for Andersen as well. According to the case, on 02/05/01, Andersen held internal meeting during which it addressed the company’s accounting from and oversight of the LJM partnership. Andersen never discussed these concerns with the Audit and Compliance Committee. Although the BOD has its faults, it should have been able to rely on Andersen’s work.

Phar-Mor, Inc. was a deep-discount store that had substantial growth in a short period of time. It started with 15 stores and grew to over 310 stores in thirty two states between 1985 and 1992. At first Phar-Mor was seen as a major prospect in the retail market. With sales of over $3 billion and growing, Phar-Mor's success even worried some of the biggest retail giant, including Wal-mart. The president, founder, and COO of Phar-Mor was Mickey Monus, who became quite extravagant with his money as Phar-Mor grew. The key to the company's success was "power buying" a phrase coined by Mr. Monus, it was a practice of stocking up on products when suppliers where offering rock-bottom prices. After using this "power buying" strategy

Enron, though not the largest scandal, could be one of the most talked about and blown up by the media. Enron was caused by a couple of reasons, though the main underlying factor behind these is a conflict of interest that has evolved in our companies. First, I think that one of the obvious causes of the Enron scandal is our legal and regulatory structure (Reid). Current laws and SEC regulations allow firms like Arthur Andersen (Enron auditor) to provide consulting services to a company and then turn around and provide the audited report about the financial results of these consulting activities (Sorkin). This is an obvious conflict of interest that is built into our legal structure and must be addressed. Second, a private company like Enron currently hires and pays its own auditors. This again is a conflict of interest built into our legal system because the auditor has an incentive not to issue an unfavorable report on the company that is paying him or her. Third, most large companies like Enron are allowed to manage their own employee pension funds. Again, this is a conflict of interest built into our

The appointment of the CIA was a major issue in the case because the chief executive officer appoints the chief internal auditor, since the CEO is responsible for running the company. He will appoint someone who is familiar with him and who will not critique

The very first question relates to one of the seven key factors that contributed to this fraud. A company would want to hire a member of its external audit team to gain their knowledge and experience. If they have been auditing the company for a while, they know how the company works and ways to improve the internal audit process. Phar-Mor’s team was made up of former auditors, including one who had worked for Cooper on the audit. Those involved with the fraud said they were able to hide what they were doing for so long because they knew what the auditors were looking for in the audit. This can be the down side of hiring an external audit member if they are involved in the fraud.

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.

The executives are accountable to the board of directors. Instead of protecting the investors, the board enticed the culture of financial fraud in the company for selfish gains. It failed in its duties in keeping the executives in check.

Although the investors are not responsible for the fraud committed at Phar-Mor they do hold partial responsibility for the loss of their investment. Because investors should remember that an auditor can only attest with reasonable assurance on audit reports that the financial statements are not materially misstated and internal controls are reliable. An investor has the responsibility to do thorough research on any potential investment reading carefully through prospectus, annual reports, and other offering information. Investors also must consider all investment risks and returns between their investments and investment objectives and remember that every investment has some degree of risk and that it is possible to lose money on any

Phar-Mor Inc. fell prey to greed from the top. Unfortunately, the auditing firm assisted the organization with the conspiracy to defraud the users of financial reporting, the government, and the stakeholders. The chief officers used the funds for personal usage and appropriated funds to functions that were not related to the organization business. The financial statements were riddled with material misstatements and fraud acts of theft were blatant. For example, the senior financial officers including the CEO grossly over stated inventory to hide losses.

The scandal that started the series of accounting scandals is Waste Management Inc. Waste Management Inc. is a publicly traded waste management company that reported 1.7 billion dollars in fake earnings (US Government Accountability Office, 2002). The accounting scandal was discovered in 1998 when a new chief executive officer took a look at the financial statements. The

At the time the fraud existed, internal controls were almost non-existent. The management team employed a number of improper accounting practices that did not comply with GAAP. As stated earlier, CEO Dean Buntrock not only allowed internal controls to be bypassed, he encouraged them to be ignored and shaped accounting policy with the sole purpose of making the targeted earnings numbers every year. The auditing firm, Arthur Andersen, LLP, was also shown to have complicity. The partners at Andersen knew that the company’s policies were not compliant so they provided Waste Management with proposed adjusting entries to their books. Waste Management refused to make the adjustments so Andersen had Waste Management sign off on a list of 32 steps the company must do to change its practices. The document legally constituted an agreement among the two parties and clearly shows that Andersen was aware of fraud that Waste Management had covered up in the past. Furthermore, Andersen did not stand up to the company and continued to

Cable provider Adelphia was one of the major accounting scandals of the early 2000s that led to the creation of the Sarbanes-Oxley Act. A key provision of the Act was to create a stronger ethical climate in the auditing profession, a consequence of the apparent role that auditors played in some of the scandals. SOX mandated that auditors cannot audit the same companies for which they provide consulting services, as this link was perceived to result in audit teams being pressured to perform lax audits in order to secure more consulting business from the clients. There were other provisions in SOX that increased the regulatory burden on the auditing profession in response to lax auditing practices in scandals like Adelphia (McConnell & Banks, 2003). This paper will address the Adelphia scandal as it relates to the auditors, and the deontological ethics of the situation.