Phar-Mor Fraud Essay

In what seemed to be a retail empire, Miki Monus (COO) inflated shareholders equity by 500 million dollars; resulting in over $1 billion in losses while building a discount chain called Phar-Mor. Phar-Mor is a tale of fraud, one of the largest in American corporate history.
In 1982 Monus opened a deep discount store that sold everything from prescription drugs to shampoo all at unbelievably low prices. Intended to undersell Wal-Mart in every market where the two giant retailers directly competed. A key philosophy to Phar-Mor lower pricing was “power buying” buying inventory when supplier go deep down.
However, Phar-Mor prices were too low that Phar-Mor started losing money year by year and Profit margin of the entire company eroded. Mounus faced with the challenge to protect the appearance of Phar-Mor success, the options are whether to announce the losses and loss the confidence

of the investors and customers or to buy some time by parking those losses and engage in creative fraudulent Accounting. Monus decided to use the second approach and start “cooking the book” to cover up Millions of dollars in loss. Monus and Finn (CFO) fraudulently understate the costs of merchandises and overstate inventory and income. In addition to the fictitious financial statement, a $10 million fraud has been reported.
Phar-Mor respected auditors, Cooper and Lybrand were negligent on checking the inventories.

It is obvious that the Auditors cannot check all the inventories in every store. However, The extent of the negligence was too extreme. Moreover, There are factors contributed to the fraud. Phar-Mor hired a member of the external audit team and gets information on which store is going to be audited, that affects the independency of the existing external auditors. Sarbanes-Oxley Act of 2002 states “It shall be unlawful for a registered public accounting firm to perform for an issuer any audit service required by this title, if a chief executive officer, controller, chief financial officer, chief accounting officer, or any person serving in an equivalent position for the issuer, was employed by that registered independent public accounting firm and participated in any capacity in the audit of that issuer during the 1-year period preceding the date of the initiation of the audit.’’ (Sarbanes-Oxley Act of 2002,section 206). In addition, SEC prohibits the role of such individuals in financial

reporting.
PCAOB required use of professional skepticism as part due professional care. “Gathering and objectively evaluating audit evidence requires the auditor to consider the competency and sufficiency of the evidence. Since evidence is gathered and evaluated throughout the audit, professional skepticism should be exercised throughout the audit process” AU section 230). However, Coopers Accepted Phar-Mor inflated inventory report year after year. In the end, the auditors declare Phar-Mor is making record profit.