Phar-Mor, Inc., the nation’s largest discount drugstore chain, filed for bankruptcy
court protection in 1992, following discovery of one of the largest business fraud and
embezzlement schemes in U.S. history. Coopers and Lybrand, Phar-Mor’s former
auditors, failed to detect inventory inflation and other financial manipulations that
resulted in $985 million of earnings overstatements over a three-year period.
A federal jury unanimously found Coopers and Lybrand liable to a group of
investors on fraud charges. The successful plaintiffs contended that Gregory Finerty,
the Coopers and Lybrand partner in charge of the Phar-Mor audit, was “hungry for
business because he had been passed over for additional profit-sharing in 1988 for
failing to sell enough of the firm’s services” (Pittsburgh Post-Gazette, February 15,
1996). In 1989, Finerty began selling services to relatives and associates of Phar-
Mor’s president and CEO (who has been sentenced to prison and fined for his part
in the fraud). Critics claim Finerty may have become too close to client management
to maintain the professional skepticism necessary for the conduct of an independent
The Phar-Mor case is just one of many in which auditors have been held accountable
for certification of faulty financial statements. Investors in the Miniscribe
Corporation maintained that auditors were at least partially responsible for the nowdefunct
company’s falsified financial statements; at least one jury agreed, holding the
auditors liable to investors for $200 million. In the wake of the U.S. savings–and–
loan crisis, audit firms faced a barrage of lawsuits, paying hundreds of millions in
judgments and out-of-court settlements for their involvement in the financial reporting
process of savings–and–loan clients that eventually failed.
The auditing partners of Coopers and Lybrand, like partners of other firms held
liable for such negligence, are very bright people. In addition, I believe that they are
generally very honest people. So, how could a prominent auditing firm with a reputation
for intelligence and integrity have overlooked such large misstatements in Phar-
Mor’s financial records? How could auditors have failed to see that so many of their
savings-and-loan clients were on the brink of failure? Critics of the profession suggest...
... middle of paper ...
...fluenced by decision
research has been behavioral finance. In the last decade, we have learned a
great deal about the mistakes that investors commonly make. This chapter will explore
these mistakes and apply the messages of the book to help readers become wiser
Chapter 8. This chapter outlines a framework to help the reader think about
two-party negotiations. The focus is on how you can make decisions to maximize the
joint gain available in a two-party decision-making situation, while simultaneously
thinking about how to obtain as much of that joint gain as possible for yourself.
Chapter 9. This chapter looks at the judgmental mistakes we make in negotiations.
The resulting framework shows how consumers, managers, salespersons, and
society as a whole can benefit simultaneously by debiasing their negotiations.
Chapter 10. The final chapter evaluates five explicit strategies for improving
judgment: (1) acquiring expertise, (2) debiasing, (3) taking an outside view, (4) using
linear models, and (5) adjusting intuitive predictions. This chapter will teach you how
to use the information in this book to create permanent improvements in your future
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