Phar Mor Case Summary
explanatory Essay
1164 words
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…
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…
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
In this essay, the author
- Explains that phar-mor inc. was incorporated in 1982 as a deep discount drug store chain, with 25,000 employees in 34 states.
- Explains that the senior officers were all former employees of the cooper & lybrand accounting firm who were familiar with the audit process.
- Explains that the introduction of sarbanes oxley 02 could not have prevented phar fraud in a post sox environment.
- Explains that phar-mor inc. was incorporated in 1982 as a deep discount drug store chain, with 25,000 employees in 34 states.
- Explains that the senior officers were all former employees of the cooper & lybrand accounting firm who were familiar with the audit process.
- Explains that the introduction of sarbanes oxley 02 could not have prevented phar fraud in a post sox environment.
- Opines that since the ceo and cfo were perpetuators of these frauds at phar mor inc., they would have signed the report as not having any fraud or material misstatement.
- Describes the waste management scandal from the late 1990's. the executive management engaged in a massive financial fraud between 1992 and 1997.
- Opines that the introduction of sarbanes oxley act 2002 would not have prevented the fraud at waste management.
- Explains that the officers were responsible for establishing and maintaining internal controls which forms the basis for the preparation of quarterly releases and annual accounts. reporting to the audit committee and auditors would have been a formality.
- Opines that section 1v, code of ethics for senior finance officers, is well-intentioned. however, when corrupt practices are entrenched, this exercise is just cosmetic to comfort regulators.
- Describes enron's scandal from the early 2000s. the houston based company 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
- Opines that 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.
- Explains title iv, section 406, code of ethics for senior finance officer. once the code is established, people are trained at all levels and management set the right tone at the top.
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- Explains that the fraud was committed by a group of top people, making sox title 3 and title 4 inefficient in the waste management case.
- Argues that title 2 of the sarbanes-oxley act would prevent using the same audit company for 30 years, hire employees directly from arthur andersen, and audit and non-audit services performed by same company.
- Explains that enron grew from being the seventh largest company in america, hiring 21 000 employees in more than 40 countries, but the company's success involved a complicated scam.
- Explains that andersen collected $ 25 million from enron for the audit service, but it has earned even more for consulting and other activities. the accounting firm fought off attempts to limit or stop them from carrying out consultancy work.
- Explains enron used off-balance sheet entities to manipulate its earnings and hide its debt. the sarbanes-oxley act of 2002 requires auditors to distinguish audit services from non-audit services.
- Explains that this section could be helpful in catching the fraudulent activities since enron wouldn't be able to hire andersen for audit purposes. the audit partner responsible for reviewing the audit must rotate every five years.
738 wordsRead More - Accounting Fraud, the Investor and the Sarbanes Oxley Actexplanatory essayThroughout 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).
In this essay, the author
- Explains that the us government amended the sarbanes oxley act of 2002 to mitigate these problems.
- Explains that when a large company commits accounting fraud and is caught, the implications from their actions are very far reaching.
- Opines that accounting fraud is not directly affected by the bankruptcies. millions of americans who were heavily invested through their 401(k) retirement plans had to postpone retirement and rethink their investment strategy.
- Explains that the us government amended the sarbanes oxley act of 2002 to mitigate these problems.
- Explains that when a large company commits accounting fraud and is caught, the implications from their actions are very far reaching.
- Opines that accounting fraud is not directly affected by the bankruptcies. millions of americans who were heavily invested through their 401(k) retirement plans had to postpone retirement and rethink their investment strategy.
- Explains how executives can "cook the books" to make a company look more profitable and stable than it actually is.
- Explains that the sarbanes-oxley act of 2002 was enacted to protect investors by fighting corporate crime and improving corporate governance.
- Explains that the board of directors in a company must have at least five financially literate members appointed for five-year terms. the audit lead or coordinator partner and reviewing partner must rotate every five years.
- Explains that the act protects whistleblowers who come forth with incriminating information about activities within their company, especially with the increasing prosecution following sarbanes-oxley.
- Explains that sarbanes-oxley provides certain blackout periods for stock trading in which officers and directors cannot purchase or sell stock. profits resulting from sales in violation of this are recoverable by the issuer.
- Explains the sec's control over sarbanes-oxley, including the ability to restrict people from serving on the board of directors if they have a securities fraud issue in their background.
- Opines that the most challenging area for companies is the saving of all communications and the creation of transparent and auditable systems for recording transactions.
- Explains that sarbanes-oxley is intended to give the investor back some measure of confidence with the internal accounting practices of the organization.
- Explains that since the act has been put into place, nothing related to financial reporting is taken for granted. most companies have implemented better corporate governance procedures. audit committees and boards of directors are now more engaged in their responsibilities.
- Opines that companies are more often identifying and modifying control shortages before misstatements happen on their financial statements.
- Explains that companies will be forced to put into place systems and processes to track and save correspondence. they will often need to start new or serious changes on their it accounting systems to meet the standards for sarbanes oxley.
- Opines that training employees on new systems, processes, and procedures is expensive and should be larger up front. they can use their trained employees to train new employees in future years.
- Explains that applying sarbanes-oxley compliance in an organization will take a significant amount of time for involved employees. documenting processes will only need to be modified down the road.
- Opines that organizations must be prepared for the controls that will be given up to their systems when following sarbanes oxley.
- Opines that companies need to show due diligence to protect themselves from accounting issues. the higher the compliance checks and balances are and the more secure processes are in place, the better chance the company has to defend itself.
- Opines that sarbanes-oxley is only effective if the general idea of the organization leans toward ethical business practices.
- Opines that whistle blower protection should be strong and understood in sarbanes-oxley to help promote ethical standards. this will allow employees to discuss issues without fear of retribution.
- Opines that sarbanes-oxley is not an option for publicly traded companies. the company must decide whether to implement the minimum to get by with compliance or do you put in place a strong system to fully protect and improve current accounting practices.
- Opines that sarbanes oxley compliance is not an overnight transition. companies need to take a look at the needs of their organization, their current structure, and put in place what will work best for their investors, employees and company.
- Describes the contents of the book, "ethics in auditing".
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