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The Case of Phar-Mor Inc Phar-Mor Inc. was a discounted drug store that was established in 1982 as part of Giant Eagle. Phar-Mar would purchase large amounts of product for a good price, then sell at a discounted rate of up to 25% to 40% off retail price. Giant Eagle also owned Tamco Distributors Co. Michael J. Monus, the vice-president of Tamco, was promoted to be the president of the company. By 1987, Phar-Mor reached up to 70 drug stores and then by 1992, 5 years later the company extended to 310 stores. Phar-Mor grew to over 25,000 employees stretching over 34 states. (Phar-Mor Inc., History) The initial sign of financial issues came to light in 1988 when Phar-Mor was reporting a lower then expected profit margin. Phar-Mor’s accounts payable showed bills for inventory from Tamco that had not been received. Both Phar-Mor and Tamco kept very poor records so it was very difficult to track the inventory. In order for Phar-Mor to compete with Wal-Mart, they cut their prices so low that Phar-Mor was not longer making a profit. When the losses were reported Mickey Monus decided to use some imaginative accounting. He told his management that he had a quick fix to account for the loss and that in a couple months when they had time he would be able to fix his creative accounting. It is very possible that Mickey Monus did not realize just how bad his actions were. …show more content…
SOX and Phar-Mor Fraud There is a good possibility that if SOX had been put into place before the Phar-Mor fraud the fraud would have not happened.
SOX requires the auditors to rotate, Title II section 203. If Phar-Mor had their auditors rotate they could have found the fraud much sooner. There is a good chance that the second auditor would not have gone along with fraud and brought it to light much sooner. (Final Rule,
2003). Ways the SOX could have prevented the Phar-Mor Fraud The Phar-Mor fraud could have been prevented had the company followed SOX Title II, section 203 the “Audit Partner Rotation” and Title II, section 206 that deals with “Conflict of Interest” Title II, Section 203. Title II of SOX is titled “Auditor Interdependence”. Section 203 addresses “Audit Partner Rotation” which states that it is against the law for an auditor of a CPA firm to preform an audit on the same company from year to year. There needs to be at least 5 years inbetween the audit services before the auditor can work on the company again. (Final Rule, 2003). It is unknown if section 203 would have uncovered the Phar-Mor fraud, but if Phar-Mor had another auditor audit their financials they may have found the fraud sooner. Title II, Section 206. Section 206 “Conflicts of Interest”. The conflict of interest part of SOX would have prevented the hiring of previous employees and make it so that they would not be able to take advantage of the company. Like with section 203 it is unclear if by having this law in place the fraud would have stopped but the fraud might not have gone on for so long. Waste Management Scandal The Waste Management scandal happened in 1998. This company stated that they had $1.7 billion in phony earnings. The key people in this scandal were the Founder/CEO/Chairman Dean L. Buntrock, his top executives, and the Arthur Anderson Company, their auditors. This company was supposedly falsifying their depreciation. They did this by increasing the span of time of their PP&E that was reported on their balance sheet. The company went through a reorganization and this was when the fraud was discovered.
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.
Edemariam, A. (2009, March 14). It all began in a small store in Arkansas.... The Guardian. Retrieved December 2, 2013, from http://www.theguardian.com/business/2009/mar/14/wal-mart-us-economy
According to PCAOB Ethics and Independence Rule 3520 a registered public accounting firm and its associated persons must be independent of the firm's audit client throughout the audit and professional engagement period. Independence is required for all audit engagements. The auditor must be independent of an entity when performing an engagement according to General Accepted Auditing Standards (GAAS). Independence is very significant to the audit profession, because the primary purpose of an audit is to provide financial statement users with reasonable assurance an on whether the financial statements are presented fairly. The auditor’s report gives credibility to an entity financial statement and without an auditor’s report the financial statement would be consider worthless. Reliance on management for the fair presentation of a financial statement would often result with a bias and impressive financial statements that doesn’t reflect a true picture of the entity’s financial position. An auditor’s independence should not in anyway be influenced by any relationship between their client and
As what it came to be as one of the notorious case of fraud in the mid-1980s; the electronic store well known as (Crazy Eddie), its owner Eddie Antar and CFO Sam Antar committed every possible act fraud there is. Just to mention two of which they perpetrated; tax evasion and securities fraud. Basically, the tax evasion was committed for many years, it was not until the company became public in 1984 that their wrong doing near its end. Once Crazy Eddie went public, a new set of rules took place, such as compliance with the Securities Exchange Commission and the scrutiny of its investors. Soon, they both realized that their long committed fraud was nearing its end, when an external audit found the real numbers on the company’s inventory, revenues,
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 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...
This did not last long because just a quickly as they rose so did they fall. Within a year their stocks were down to little of nothing, and their name was not one someone wanted to be associated with. The downward spiral can be contributed to the organization culture and improper checks and balances.
The purpose of this case study is to investigate and bring new insight to situations and behaviors within an organization. Case studies are learning tools which utilize social science research to identify and resolve individual and organizational challenges (K. Mariama-Arthur Esq., 2015).
In modern day business, there can be so many pressures that can cause managers to commit fraud, even though it often starts as just a little bit at first, but will spiral out of control with time. In the case of WorldCom, there were several pressures that led executives and managers to “cook the books.” Much of WorldCom’s initial growth and success was due to acquisitions. Over time, WorldCom discovered that there were no more opportunities for growth through acquisitions when the U.S. Department of Justice disallowed the acquisition of Sprint.
The Marriott Corporation (MC), had seen a long, successful reign in the hospitality industry until the late 1980s. An economic downturn and the 1990 real estate crash resulted in MC owning newly developed hotel properties with no potential buyers in sight and a mound of debt. During the late 1980s, MC had promised in their annual reports to sell off some of their hotel properties and reduce their burden of debt. However, the company made little progress toward fulfilling that promise. During 1992, MC realized that financial results were only slightly up from the previous year and their ability to raise funds in the capital market was severely limited. MC was left with little choice, as they had to consider some major changes within the company if they wished to remain a successful business. Thus, J.W. Marriott, Jr., Chairman of the board and president of MC, turned to Stephen Bollenbach, the new chief financial officer, for ideas and guidance.
In 2002, WorldCom’s bankruptcy was the largest in US history; WorldCom admitted that it had falsely booked $3.85 billion in expenses to make the company appear more profitable. Ebber who was CEO of WorldCom created fictitious some more than questionable accounting practices. Thus began the practice of taking an operating expense and reclassifyin...
This all happened under the watchful eye of an auditor, Arthur Andersen. After this scandal, the Sarbanes-Oxley Act was changed to keep into account the role of the auditors and how they can help in preventing such scandals.
In 1958, Alex Grass incorporated Rack Rite Distributors, Inc. Grass opened Rite Aid’s first store, through Rack Rite, in 1962, as a Thrift D Discount Center, in Scranton, Pennsylvania. 1963, Thrift D Discount Center became a drugstore chain when they opened five more stores. In 1965, the Thrift D Discount Center expanded to five northeastern states by quickly acquiring and opening new stores. In 1966, the first Rite Aid store opened in New Rochelle, New York. 1976, they introduced seventy Rite Aid private label products. The next year, 1968, they changed their name, officially, to Rite Aid Corporation and started trading on the American Stock Exchange. Then, two years later, in the beginning of the 1970’s, they moved to the New York Stock Exchange. Again, two years later, 1972, they had been operating 267 stores in 10 states. 1981, nine years later, they became the third-largest retail drugstore chain in the country. In 1983, they made over $1 billion in sales. In 1987, their twenty-fifth anniversary was celebrated and they, by then, had 420 stores in 9 states and Washington D.C., as well as Pennsylvania, where they started their business as a Thrift D Discount Center, in Scranton. Their market had greatly expanded and they had passed the 2,000-store mark to become the nation’s largest drug store chain in terms of store count. Eight years later, in 1995, they acquired Perry Drug Stores, the biggest chain of drugstores in Michigan. It was their largest acquisition to date. By then they had operated nearly 3,000 stores. That same year, Martin Grass succeeded his father Alex Grass, as Chairman and CEO of Rite Aid. The year after that, they had grown out to the West Coast and the Gulf Coast, adding more than ...
Conflict of interest is a big problem between Enron and its auditing firms. It is believes that Enron’s auditors was hide many information and external auditors never aware or hide the losses in Enron. From audit committees to transparency committees would increase the likelihood that a firm’s key business ricks are transparent to investors (Healy & Palepu 2003, p. 21). Besides, a transparency committee can also help with internal auditor appreciate its primary responsibility lies with the board, not for personal interest and pleasing the leader.
The complete destruction of companies including Arthur Andersen, HealthSouth, and Enron, revealed a significant weakness in the United States audit system. The significant weakness is the failure to deliver true independence between the auditors and their clients. In each of these companies there was deviation from professional rules of conduct resulting from the pressures of clients placed upon their auditors (Goldman, and Barlev 857-859). Over the years, client and auditor relationships were intertwined tightly putting aside the unbiased function of auditors. Auditor careers depended on the success of their client (Kaplan 363-383). Auditors found themselves in situations that put their profession in a questionable time driving them to compromise their ethics, professionalism, objectivity, and their independence from the company. A vital trust relationship role for independent auditors has been woven in society and this role is essential for the effective functioning of the financial economic system (Guiral, Rogers, Ruiz, and Gonzalo 155-166). However, the financial world has lost confidence in the trustworthiness of auditor firms. There are three potential threats to auditor independence: executives hiring and firing auditors, auditors taking positions the client instead of the unbiased place, and auditors providing non audit services to clients (Moore, Tetlock, Tanlu, and Bazerman 10-29).