Unraveling Phar-Mor: A Study on Corporate Fraud

Case Study Examination and Ethical Questions
Fraudulent activities within a company can lead to its downfall and prosecution of those responsible for said fraud. More than 80% of fraud committed within an organization occurred within accounting, operations, sales, executive or senior management, customer service or purchasing according to an Association of Certified Fraud Examiners (ACFE) 2010 survey (Association of certified Fraud Examiners, 2010). In the case of Phar-Mor, the fraud was initiated by the Chief Operating Officer (COO), Mickey Monus, and supported by the Chief Financial Officer (CFO), Patrick Finn in response to declining profits of the company.
Case Study: Phar-Mor
Fraud can be perpetrated by anyone within an organization. Where the blame lies is dependent upon who commits the fraud, and the length of time it goes undetected. IN the case of Phar-Mor, the fraud the inevitably resulted in the destruction of the company was perpetrated by Mickey Monus, the COO, but is he solely to blame? Not in this case. Yes, he utilized his authority to perpetrate the fraud, however his CFO, not only agreed to comply with Mr. Monus’ instructions, he was later assigned the job of continuing to falsify the financial statements. Furthermore, Mr. Anderson, the accounting manager also became embroiled in the fraudulent activities.

Additionally, not only were financial statements themselves altered, invoices and inventories were also altered, of which it is not indicated were initiated by Mr. Monus. These activities were later undertaken to support the continuing fraudulent activities in an effort to continue the profitable status of the company.
Furthermore, though the company employed independent auditors, said auditors failed in their duties to detect the fraud through lax auditing practices. Cooper and Lybrand, the company’s auditors only audited the inventory of 4 of the 300 stores and informed Phar-Mor which stores they would be auditing. Only auditing such a small number of stores was a failure on the part of the auditors. Providing executives with the specific stores in which they would conduct the audit provided Phar-Mor the opportunity to adjust figures and move physical inventory to further hide their fraudulent activities.
Finally, Mr. Shapira also shares in the blame for the fraud that destroyed his company as he employed a hands-off approach to operations which provided the opportunity for Mr. Monus to initiate the fraud. The final results of Phar-Mor’s destruction were a direct lack of ethical decision making by all parties directly and indirectly involved with the operations of the company.
Ethical decision making is essential to the success of any business venture. Within ethical decision making likes the key component: moral intent (Mintz & Morris, 2014). Mr. Cherelstein, having been apprised of the fraudulent activities occurring within Phar-Mor, faced the decision to continue the act, or report the situation to Mr. Shapira, the Board of Directors, and potentially the Securities and Exchange Commission (SEC). In making his decision, Mr. Cherelstein can employ Rest’s Model of ethical decision making.
Rest’s model of ethical decision making is comprised of four parts; moral sensitivity, moral judgement, moral motivation, and moral character (Mintz & Morris, 2014).

Mr. Cherelstein had been informed of the company’s dual accounting records. Though he did not initiate or participate in the fraud, he engaged in the first step of Rest’s model because he was now aware of the unethical situation and its immorality as he felt compelled to do something about the situation. Furthermore, he understood that should the fraud be brought to light or suppliers refuse to stock the stores, it would result in the end of the

company.
As Mr. Cherelstein was aware of the results of suppliers stopping stock shipments, he must decide the best course of action. Through Rest’s model of ethical decision making; moral judgment, Mr. Cherelstein must decide what the most morally justifiable course of action is for this situation. In the case of Phar-Mor, criminal fraud had been committed over the course of many years. Profits had been overstated in excess of $300 million dollars, and the COO had personally supported his own lifestyle through his fraudulent actions (Mintz & Morris, 2014). As Mr. Cherelstein held the title of Chartered Management Accountant (CMA), the morally justifiable action to take was to immediately report the ongoing fraud within Phar-Mor.
Additionally, Mr. Cherelstein, aware of the moral situation and understanding the moral justification, must employ Rest’s moral motivation and rely on moral character to engage in the morally justifiable action in the case of Phar-Mor. Mr. Cherelstein must be willing to put ethical values ahead of self-interest (Mintz & Morris, 2014). He must engage his moral character to comply with the oath he had taken when receiving the title of Chartered Management Accountant.
Finally, Mr. Cherelstein must choose to report the dual accounting books and the fraud committed within Phar-Mor to Mr. Shapira and the Board of Directors despite the fact it will undoubtedly result in the end of the company and his own employment. To comply at this stage would be a violation of his oath as a CMA, further damage the creditors of Phar-Mor who were owed in excess of $10 million dollars, and cause further losses to the investors of the company.
Mr. Monus’s ethical behavior may have been initiated as a one-time situation. He may have believed he could return Phar-Mor to a profitable state. Mr. Finn, blindly trusted in Mr. Monus’ abilities and allowed himself to become an accomplice to one of the largest corporate fraud cases in the United States. Had Mr. Finn utilized Rest’s model of ethical decision making and not complied with Mr. Monus’s instructions, of if Mr. Monus himself had possessed the moral ethics not to engage in said fraud, Phar-Mor may have survived and recovered from the losses, and Mr. Monus would not have been convicted of $1 billion dollars of fraud, embezzlement, and tax evasion (Collins, 1995). Fraudulent acts to misrepresent a company are never the appropriate path to take, and ethics must always prevail.
Ethical Questions
Ethical decision making is required in all aspects of business and personal conduct. Without ethics and ethical decisions, situations such as those that occurred at Phar-Mor and other organizations become acceptable acts and culture within the organization. Several theories and models can be utilized in making sound ethical decisions such as virtue-based reasoning, professional skepticism, and ethical principles and standards.
Virtue-based reasoning is an ethical decision making model developed by Linda Thorne. Thorne’s integrated model of ethical decision making follows the cognitive-developmental perspective in that ethical actions occur because of a rational decision-making process (Mintz & Morris, 2014). Additionally, it relies on the individual’s personal ethical decision-making process and cognition in making ethical decisions. Therefore, moral virtue promotes ethical motivation which results in ethical intentions, and instrumental virtue promotes ethical character which ultimately results in ethical behavior. Therefore, ethical motivation creates the ability to put others’ above themselves thereby creating ethical character resulting in ethical behaviors.
While maintaining ethics, auditors must utilize professional skepticism to evaluate sufficiency and competency of data when inspecting financial statements of their clients. Auditors must make ethical decisions as to the accuracy of said financial statements. To accomplish this feat and ensure investors are receiving accurate data with which to make sound judgements regarding the company in which they invested, an auditor must remain unbiased and impartial.
Professional skepticism therefore provides this required unbiased and impartial attitude (Heath & Staggs, 2015). Essentially, professional skepticism enables the auditor to remain alert to inconsistencies, and to question said inconsistencies which may indicate fraud within the documents they are examining (Institute of Chartered Accountants of England and Wales, 2012). Utilizing the skill of professional skepticism allows the auditor to provide a successful audit engagement for their clients.
Within the accounting profession’s code of ethics are principles and standards by which accountants must make professional judgments. Ethical principles and standards, therefore, are a guide to which Accountants can refer in situations where definitive rules have not been established. As it is impossible to anticipate every potential situation of which an accountant will experience, utilizing the principles and standards embedded within the code of ethics will provide the accountant as a moral compass to navigate the situation in which they find themselves.
A Certified Public Accountant (CPA) must provide accurate information in performing their duties, and never knowingly falsify the information provided by their clients or alter their judgments of the documentation provided. Rest’s model of moral development; moral sensitivity, moral judgement, moral motivation, and moral character, can guide the CPA in maintaining correct judgement in their engagements.
When pressured by a client to falsify data to the benefit of said client, the CPA must maintain the moral sensitivity to recognize such pressures. Additionally, they must employ moral judgment through professional skepticism in their approach to the situation, keeping the interests of investors above the interest of their client. Finally, when faced with such pressures, the CPA must uphold the willingness or moral motivation to put their ethics first, and the moral character to carry out said ethics in the face of the pressures exhibited by their client.
Conclusion
Fraud and unethical decisions can ultimately lead to the destruction of an organization. Additionally, knowingly engaging in such acts can result in criminal charges. It is the responsibility of the CPA and auditors to ensure the financial statements of organizations are accurate by employing sound ethical judgement, professional skepticism, and providing thorough auditing services. Through ethical decision making, investors, management, and financial institutions can utilize financial documents to make informed decisions regarding an organization.