An Analysis of Phar-Mor Inc.

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Phar-Mor Inc.

Phar-Mor Inc. became well known drug store for selling its products with a very high discount rate. In ten years the business grew to 310 outlets and was serving 32 states across the country. Later the company became known for one of the biggest fraud committed in 90s.
Phar-Mor Inc. involved its sister company Tamco in the illegal activities as well. Both companies didn’t have proper records resulting in $4 million inventory overbilling. The next problem for Phar-Mor Inc became with the formation of World Basketball League. The president of Phar-Mor Inc. owned 60% of WBL and was responsible for its losses, which he would take care of by using funds from the drug business. More over he embezzled $200,000.00 for his personal home improvement.
Phar-Mor Inc. was able to cover losses with the help of what they consider "bucket account". They moved all fraudulent activities through this account, because they knew that the auditors will not look at any accounts that have a zero balance.
According to CPA Journal there are five SOX sections the address aspects of the fraudulent activities of Phar-Mor management: “Audit Partner Rotation”, “Conflicts of interest”, “Corporate Responsibility for Financial Reports”, “Management Assessment of Internal Controls” and “Code of Ethics for Senior Financial Officers”.
SOX would be able to prevent hiring the same audit firm for more than five years. Also some members of the fraudulent team were former employees of the audit company. Due to Conflict of interest section, Phar-Mor Inc. wouldn’t be able to hire employees from Cooper without breaking one-year rule. In this case it would be much harder for the top management to hide illegal activities without knowing the audit procedures. O...

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... for the audit service, but it has earned even more for consulting and other activities. Accounting firm fought off attempts to limit or stop them from carrying out consultancy work for clients of the audit; they insist that there is no real conflict of interest.
Enron used off-balance sheet entities to manipulate their earnings and hide its debt. Sarbanes-Oxley Act requires more disclosure of off-balance sheet entities. Also The Sarbanes-Oxley Act of 2002 requires auditors to distinguish audit services and non-audit services or to avoid any
Conflict of interest. So this section could be helpful in catching the fraudulent activities, since Enron wouldn’t be able to hire Andersen for audit purposes. More over the audit partner responsible for reviewing the audit must rotate every five years. This will prevent ongoing fraud from occurring for more than a few years.

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