Phar Mor Fraud Essay

Chi Nguyen
Professor Wills
Audit and Assurance
April 15th, 2018
Fraud Research Paper
Background of the Company Phar-Mor Inc., founded in 1982 as an affiliate of Giant Eagle, was one of the top ten deep discount drug store chains in the United States. The deep discount segment of the drug store was the result of the Great Depression in the past. During that time, because consumers wanted quality goods at low prices, a lot of companies tried to cut down the overhead costs and used purchasing techniques to maintain profit. Phar-Mor was not the exception. Phar-Mor saved its money by renting older and cheaper retail places to open stores, reducing marketing costs with its hand-made product displays, and purchasing limited quantities of a product

Instead, the fraud was uncovered when a travel agent suspected something wrong from a check signed by Micky Monus for a World Basketball League’s expense, which was not related to Phar-Mor business. The agent then showed the check to her landlord, who was an investor of Phar-Mor. The landlord expressed his concern about the check to David Shapira, Phar-Mor’s CEO. After that, Shapira disclosed to the public that Phar-Mor was involved in a huge fraud that was instigated mainly by Mickey Monus and Patrick Finn. When auditors dug deeper into the World Basketball League (WBL), they discovered that Monus owned at least 60% of the WBL, and he used a large-scale embezzlement to help finance his major-shareholder position in the

history. The $500 million accounting fraud caused over one billion dollars in losses and forced Phar-Mor to file for bankruptcy protection under Chapter 11 in 1992. The major groups that were directly affected by the fraud were both insider and outsider investors, employees, and suppliers. Monus was sentenced to 19 years and a half in federal prison, Patrick Finn received 33 months in prison, and other managers admitted to the fraud were fined over one million dollars for their involvement. After Shapira announced the bankruptcy, he immediately laid off 1,000 employees. By the end of 1993, the company had closed or sold 167 of over 300 stores, and many employees lost their jobs. The Phar-Mor’s scandal was a controversy at that time and the entire deep discount drug category was in trouble. Many stores closed to cover up losses, and thousands of employees got fired. Moreover, investors started to worry and thought that there was no reason that other companies would not “cover the book” like what Phar-Mor had done. Therefore, not many investors were interested in investing into such kind of business. Phar-Mor’s suppliers also got affected from the scandal. Monus had always putting pressure on suppliers to have on-deal products, but he did not pay a lot of bills for them. Many suppliers expressed their anger when they still had to work with Phar-Mor just because Phar-Mor had many