The Case of Phar-Mor Inc. Phar-Mor Inc. was incorporated in 1982 as a deep discount drug store chain. The chain has grown from seventy stores in 1987 to 310 by 1992, with 25,000 employees in 34 states. Phar- Mor- was engaged in creative accounting practices: inventory was overstated as proper inventory records were not maintained to support inventory purchases; $15 million was embezzled from Phar-Mor to support WBL activities and over $200,000 were used for upgrades to his personal residence and meals to his country club. As the losses mounted, the losses were charged to what senior staff referred to a “bucket account” and were then reallocated to the inventory of the existing stores. The senior …show more content…
officers were all former employees of the Cooper & Lybrand accounting firm who were all familiar with the audit process. The auditors did not comply with the auditing standards and did not check accounts with zero balance, the bucket account was not reviewed, and that the auditors only observed inventory at four stores. I will now examine the introduction of Sarbanes Oxley 02 and show the relevant sections could not have prevented Phar fraud in a post SOX environment: Title 11, section 203, “Auditor partner Rotation ’’ Registered Public Accounting firms may not provide audit if the lead audit partner or reviewing partner has performed audit for the issuer in each of the five fiscal years of the issuer.
It therefore means that if the audit partner was on the job at the initiation of the fraud in 1989, he would have been rotated off and a new partner appointed. It is common practice for auditors to use the very methodology that applied by their predecessors and this approach would not have identified the frauds. In addition the amount of work done by auditors depends largely on the budget which could impact on the quality of the …show more content…
audit. Title 111, section 302, “Corporate Responsibility for Financial Reports” This section states that the principal executive officers and principal financial officers are required to certify in each annual and quarterly reports that they have reviewed the reports and based on their knowledge there is no material misstatement; Are responsible for establishing and marinating internal controls and reporting to the audit committee and auditors any material misstatement, deficiency or fraud to the audit committee and auditors. Since the CEO and CFO were both perpetuators of these frauds at Phar Mor Inc. I am not convinced that they would have signed the report as not having any fraud or material misstatement. Furthermore, they showed little or no moral standing and were more concerned about their selfish objectives to cover up the losses. Waste Management Scandal from the later 1990’s, a brief description. The executive management of Waste Management were engaged in perpetuating a massive financial fraud lasting more than five years between 1992 and 1997.
Profits were inflated by $1.7 billion to meet earnings targets which resulted in investors losing more than six billion dollars while the perpetuators made their illegal loot. The officers were engaged in improper accounting practices to achieve their selfish objectives. These practices included among others: excluding depreciation charges on their garbage trucks, extending their useful lives, capitalized operating expenses and failed to make provisions to pay income tax and other expenses. In addition, Arthur Andersen, has been appointed auditor for a considerable period and issued unqualified audit opinions on accounts which contained many fraudulent
misrepresentations. The introduction of Sarbanes Oxley Act 2002 would not have prevented the fraud at Waste management with the application of the following sections: Title 111, section 302, Corporate Responsibility for Financial Reports This sections specifies the responsibilities of the chief executive officer and the chief Financial officer are required to certify all quarterly releases and annual reports. It is likely that these officers would have been prepared to certify the release because these irregular practices were carried out by the main management team and it was not apparent that anyone would have brought this matter to public attention to pressure management. The officers are responsible for establishing and maintaining internal controls which forms the basis for the preparation of quarterly releases and annual accounts. This was completely disregarded because they knew that they could have signed the reports as they were accountable to themselves. Reporting to the audit committee and auditors would have been a formality because they knew again that the main officers were all connected to the fraud. Also they knew that the external auditors would have issued an unqualified opinion on the accounts as was done every year. Section 302 would not have made a difference since all parties were more concerned about their bonuses rather than the interest of investors. Section 1V, Code of Ethics for senior finance officers. This section is well intentioned and there are instances where companies invest heavily in establishing code of conduct, holding training programs and appoint officers in senior positions to oversee the program. However, when corrupt practices are entrenched as in the case of Waste Management, this exercise is just cosmetic to comfort regulators that compliance procedures are being followed. This is evident since the introduction of Sox 2002, many companies continue to commit scandals, and examples include Freddie Mac, 2003, Health South 2003 and AIG 2003 and many more. Enron’s scandal from the early 2000’s, a brief description Enron was a Houston based company which kept huge debts off the balance sheet by practicing structured financing using SPEs’ and these special entities were not included in the as part consolidations . Consequently, shareholders lost $74 billion, thousands of employees and investors lost their retirement accounts and many employees lost their jobs. The introduction of Sarbanes Oxley 2002 would have prevented this scandal as shown in the application of the following sections: Title 111, Section 302 Corporate responsibility for financial reports. This section details the requirements for the CFO and CEO in certifying quarterly releases and annual account among other responsibilities. It is unlikely with the responsibilities in this section that those officers would want to certify reports that contain errors, fraud or maternal misstatements because, they could suffer civil and criminal liability. Similarly senior officers would not want their reputation and standing to diminish. The responsibilities in this section are sufficient to restrain senior officers from engaging in practices that would hurt the company. Title IV, Section 406, Code of ethics for senior finance officer. This section details the requirements for maintaining code of ethics among finance officers. Once the code is established, people are trained at all levels and management set the right tone at the top, it is more than likely that this will permeate from top to bottom. Senior officers who attempt to corrupt the books could easily be exposed by whistle blowers which could lead to termination of employment. Providing that the code is properly implemented and enforced, it will serve as a deterrent to fraud or any behavior that undermines the interest of all stakeholders.
Nimi Feghabo is an Atlanta-based consultant in Capgemini’s Custom Software Development service line. She has worked and acquired knowledge in many different industries spanning from Accounting to the Legal Industry. She brings significant leadership experience along with a proven track record. Prior to Capgemini, she has had experience in various industries which include legal, manufacturing, and international professional services. Her contributions include software implementation, ERP development, and facilitating changes. Through these projects, she has gained valuable insight and is able to develop transformative solutions into an effective facilitation strategy.
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.
Take into consideration the auditors from Arthur Andersen. They did not take into consideration the greatest good for the greatest number of people. The auditors from Arthur Andersen took into consideration the consequences only for their own firm and their own well-being. Vinson & Elkins lawyers should not have destroyed evidence in order to protect their client Enron. Lawyers do take an oath to help protect and defend their client but they are not to help find ways for their client to violate the
The CFO, Andrew Fastow, systematically falsified there earnings by moving company losses off book and only reporting earnings, which led to Enron’s bankruptcy. Any safeguards or mechanisms that were in place to catch unethical behavior were thrown out the window when the corporate culture became a situation where every person was looking out for their own best interests. There were a select few employees that tried to get in front of the unethical accounting practices, but they were pushed aside and silenced. The corporate culture at Enron became a place where if an employee would not make unethical decisions then they would be terminated and the next person that would make those unethical decisions would replace them. Enron executives had no conscience or they would have cared for the people they ended up hurting. At one time, Enron probably was a growing company that had potential to make a difference, but because their lack of social responsibility and their excessive greed the company became known for the negative affects it had on society rather than the potential positive ones it could have had. Enron’s coercive power created fear amongst the employees, which created a corporate culture that drove everyone to make unethical decisions and eventually led to the downfall and bankruptcy of
Throughout the past several years major corporate scandals have rocked the economy and hurt investor confidence. The largest bankruptcies in history have resulted from greedy executives that “cook the books” to gain the numbers they want. These scandals typically involve complex methods for misusing or misdirecting funds, overstating revenues, understating expenses, overstating the value of assets or underreporting of liabilities, sometimes with the cooperation of officials in other corporations (Medura 1-3). In response to the increasing number of scandals the US government amended the Sarbanes Oxley act of 2002 to mitigate these problems. Sarbanes Oxley has extensive regulations that hold the CEO and top executives responsible for the numbers they report but problems still occur. To ensure proper accounting standards have been used Sarbanes Oxley also requires that public companies be audited by accounting firms (Livingstone). The problem is that the accounting firms are also public companies that also have to look after their bottom line while still remaining objective with the corporations they audit. When an accounting firm is hired the company that hired them has the power in the relationship. When the company has the power they can bully the firm into doing what they tell them to do. The accounting firm then loses its objectivity and independence making their job ineffective and not accomplishing their goal of honest accounting (Gerard). Their have been 379 convictions of fraud to date, and 3 to 6 new cases opening per month. The problem has clearly not been solved (Ulinski).
The law requires auditors to report any fraudulent activities discovered during the course of an audit to the SEC. This is when Article I of Section 51 of the AICPA Code of Professional Conduct comes into play. The auditor may uncover illegal acts or fraud while auditing the financial statements of a company. In such instances, the auditor must determine his or her responsibilities in making the right judgment and report their discovery or suspicions of the said fraudulent activities. Tyco International is an example of the auditors’ failure to uphold their responsibilities. Tyco’s former CEO Dennis Kozlowski and ex-CFO Mark Swartz sold stocks without investors’ approval and misrepresented the company’s financial position to investors to increase its stock prices (Crawford, 2005). The auditors (PricewaterhouseCoopers) helped cover the executives’ acts by not revealing their findings to the authorities as it is believed they must have known about the fraud taking place. Another example would be the Olympus scandal. The Japanese company, which manufactures cameras and medical equipment, used venture capital funds to cover up their losses (Aubin & Uranaka, 2011). Allegedly, thei...
Rather than being sticklers for following GAAP accounting principles and internal controls, this company took unethical behavior to a whole new level. They lied when the truth would have been easier to tell. It is almost as if they had no comprehension that the meaning of the word ethics is “the principles of conduct governing an individual or a group (professional ethics); the discipline dealing with what is good and bad and with moral duty and obligation”, (Mirriam-Webster, 2011). To be ethical all one has to do is follow laws, rules, regulations and your own internal moral compass, all things this company seemed to know nothing about.
In the wake of the Madoff Ponzi schemes, the SEC has stepped up investment regulation and fraud detection measures. Additionally, the Sarbanes-Oxley Act of 2002 (SOX) was passed as direct result of the Enron and WorldCom ethic violations. SOX has been characterized as "the most far reaching reforms of American business practices since the time of Franklin Delano Roosevelt” mandated a number of changes to improve financial disclosures from corporations and prevent accounting fraud. SOX also created the Public Company Accounting Oversight Board (PCAOB) to oversee the activities of the auditing profession. Had the PCAOB been in place perhaps Arthur Anderson would not have been so quick to turn a blind eye to Enron’s accounting irregulars.
Since the early 1970s, the auditing profession has been under increased pressure and scrutiny by government and users of audit reports. The phrase ‘ Audit Expectations Gap’ was first coined when the AICPA put the Cohen Commission together in 1974 to investigate whether the ‘expectations gap’ existed. However, the history of the expectation gap goes right back to the start of company auditing in the nineteenth century (Humphrey and Turley 1992). Since then, events ranging from the collapse of Arthur Anderson to the ongoing savings and loan problems seemed to have made the gap become more and more apparent.
Unethical accounting practices involving Enron date back to 1987. Enron’s use of creative accounting involved moving profits from one period to another to manipulate earnings. Anderson, Enron’s auditor, investigated and reported these unusual transactions to Enron’s audit committee, but failed to discuss the illegality of the acts (Girioux, 2008). Enron decided the act was immaterial and Anderson went along with their decision. At this point, the auditor’s should have reevaluated their risk assessment of Enron’s internal controls in light of how this matter was handled and the risks Enron was willing to take The history of unethical accounting practic...
They were committing fraud by creative accounting, acting illegally when using insider trading and shredding their documents relevant to the investigation. Next, consider the stakeholders. Anyone who owns stock in the company would suffer, along with every employee. Under the values bullet we can assume that they have none. Greed and power got the better of every one of them.
Enron was on the of the most successful and innovative companies throughout the 1990s. In October of 2001, Enron admitted that its income had been vastly overstated; and its equity value was actually a couple of billion dollars less than was stated on its income statement (The Fall of Enron, 2016). Enron was forced to declare bankruptcy on December 2, 2001. The primary reasons behind the scandal at Enron was the negligence of Enron’s auditing group Arthur Andersen who helped the company to continually perpetrate the fraud (The Fall of Enron, 2016). The Enron collapse had a huge effect on present accounting regulations and rules.
Prior to 2000, Enron was an American energy, commodities and service international company. Enron claimed that revenue is more than 102 millions (Healy & Palepu 2003, p.6). Fortune named Enron “American most innovative company” for six consecutive years (Ehrenberg 2011, paragraph 3). That is the reason why Enron became an admired company before 2000. Unfortunately, most of the net income for the years 1997-2000 is overstated because of unethical accounting errors (Benston & Hartgraves 2002, p. 105). In the next paragraph, three main accounting issues will identify for what led to the fall of Enron.
Dowd (2016) runs above and beyond with the clarification to state accounting fraud incorporates the change of accounting records in regards to sales, incomes, costs and different components for a profit motive, for example, boosting organization stock prices, getting ideal financing or maintaining a strategic distance from obligation commitments. Dowd is of the feeling that covetousness, absence of straightforwardness, poor administration data and poor accounting interior controls are a couple of explanations behind accounting fraud. (Dowd,
Auditing has been the backbone of the complicated business world and has always changed with the times. As the business world grew strong, auditors’ roles grew more important. The auditors’ job became more difficult as the accounting principles changed. It also became easier with the use of internal controls, which introduced the need for testing, not a complete audit. Scandals and stock market crashes made auditors aware of deficiencies in auditing, and the auditing community was always quick to fix those deficiencies. Computers played an important role of changing the way audits were performed and also brought along some difficulties.