Phar Mor, Inc. was one of the largest private companies in US. In the late 1980s, Phar Mor expanded itself in 32 states and recorded sales of $3 billion. But in 1992 Phar-Mor, Inc. faced an accounting fraud of $500 million and came to bankruptcy. For enhancing the credit line, the company made and submitted untrue financial statements to the auditor and investors. These fabricated financial statements benefitted Phar Mor to defrauded many banks and investors. The president, Vice president of marketing, COO, CFO, controllers, the director of accounts and the audit firm all are carried out this fraud. This fraud was carefully carried out over many years.
1. Motivation:
All the types of investors were badly affected through this fraud. There
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Mickey Monus and other members from the management put all their losses into the account of expense and increased the value of asset accounts in order to hide their losses, and Mickey Monus came up with inflating the inventory idea. This fraud would not have happened if the auditors hadn’t neglected their job responsibility. Cooper stated that the audit of Phar Mor was according to the GAAP (General Accepted Accounting Principles). In this case, Cooper hardly checked 4 stores out of 310 stores of Phar Mor and only selected 25 to 310 items per store from the stock. Then conducted price testing on the selected items per store. Before conducting the audit of all stores, the auditors told in advance to the management that which store will be audited. The losses are in millions of dollars and all the losses were divided among 310 stores and recorded as an expense on the balance sheet of each store. By using the inflating inventory idea, the management boosted the assets account. Through this strategy, the management balanced their expenses. In order to save money, the auditors only checked four stores of the company through the consolidated general ledger. They already told the senior management about the audit in advance. This alerted the upper management and the management of Phar Mor prepared the physical inventory according to the balance sheet before the auditors conducted audit at the store. Because of this strategy, the