Phar-Mor Fraud Essay

With different industry definitions and viewpoints, fraud can be a tough issue for audit committee members to grasp for oversight purposes. The legal obligations of audit committee members have intensified because their standard duty of care and loyalty to the entity has increased in light of management fraud activities.

Professional auditing standards discuss the three key “conditions” that are typically present when a financial fraud occurs and identify a lengthy list of “fraud risk factors.”

Getting an internal auditor into the government office was a great move on their part. We can now move forward in this case as we have established that fraud is taking place. The next steps that could be made it to pay close attention to the employees. Any suspicious behavior, such as a sudden eager to work till late at night, or even noticing bad habits like gambling or drug problems could lead someone to steal. Another way to aid against fraud is to control and intensify the paper trail. Make it difficult to be able to get away with cash without recording it and clearing it with someone

This paper discusses a brief history of Pat, his wrongdoings and related action, and the response by the related law enforcement agencies.

AICPA Code of Professional Conduct principles prevents vises such as fraud that are experienced in accountancy field. Audit is the best measure of the effect of the fraud that are imposed to investors by accountants. The relationship of the investors and account holders are supposed to be affirmed through auditing to ensure accounting principles are upheld(Weirich, Pearson, & Churyk, 2010). Improper loss of the funds through propagation of the accountant officer should be treated as fraud and criminal activity that should lead to prosecution. Therefore, the paper seeks to relate two fraud cases that have been audited and presenting AICPA Code of

In the case of Phar-Mor fraud, the company was involved in cover up and some accounts were created to hide the fraudulent activities. Bad inventory counts in the stores were made to help with the cover up and deceit about activities that cost hundreds of millions of dollars. (Williams, S.L., 2011)

Considering the elaborateness of the Phar-Mor fraud, I don’t think it would have been completely prevented, but I do believed that had SOX been implemented at the time, the fraud would have been uncovered much sooner than the decade it took. By applying Title II, Section 203, “audit partner rotation” a registered public account firm may not provide an audit if the lead audit partner has performed audit services in each of the five previous fiscal years. Section 206 states that any auditor who had previously worked for the firm and now works for Phar-Mor would make it a conflict of interest and therefore, unlawful for the firm to perform any audit service. Phar-more had 3 employees who were previously employed by Coopers, the audit firm. Section 404 requires that internal controls be assessed and tested once per fiscal year which would have helped uncover the fraud much sooner since the auditors would have been required to check over the inventory

There are various procedures that could be taken in to account that would, if properly implemented, would have detected the frauds that occurred within the companies. There are many control risks that should have been taking regarding inventory along with preliminary audit strategies for the inventory and substantive test to be done that would have raised many flags during the typical audits as well as in depth ones.

By reviewing SOX’s sections it was noted there are four sections that could address the aspects of the fraudulent activities at Phar-Mor. It’s very complicated to precise the fraud would be successfully prevented in this case since it was perpetuated at a very high level thereby there is a great chance the executives would have found a way to hide it. In this case as the fraud was perpetrated at the top executive’s level, SOX probably would prevent the involvement of some other employees in the scheme, however the fraud activities would have occurred whether or not SOX was in place at the time. Nevertheless, it is indisputable that SOX could have prevented the scandal.

The Company was a manufacturer of computer hard disk drives (Financial Executives Research Foundation, 2015) based in Longmont Colorado in 1989. The CEO, CFO and other members of management sought to defraud by managing earnings of the Company with fraudulent inventory, receivables and journal entries. The executives and management created boxes of inventory with bricks and scraps of metal for the auditors

Fraud Risk: These weakness affects all levels of the internal control environment and other areas of the company. It shows that internal controls are not as important as meeting the company’s performance outlooks. If management does not openly display ethical conduct, the expectation of fraud and misappropriation

Although the investors are not responsible for the fraud committed at Phar-Mor they do hold partial responsibility for the loss of their investment. Because investors should remember that an auditor can only attest with reasonable assurance on audit reports that the financial statements are not materially misstated and internal controls are reliable. An investor has the responsibility to do thorough research on any potential investment reading carefully through prospectus, annual reports, and other offering information. Investors also must consider all investment risks and returns between their investments and investment objectives and remember that every investment has some degree of risk and that it is possible to lose money on any

WorldCom was involved in two major forms of financial statement fraud schemes, overstatement of revenue and understatement of line costs (Vance, 2016). WorldCom was overstating there revenue by regularly monitoring revenue through the sales groups’ performances measured against the revenue plan (Vance, 2016). Every two to three months a meeting was held that brought each sales channel’s manager and they were obligated to present and defend their sales channel’s performance compared to the budgeted performance (Vance, 2016). The major tool that measured and monitored the revenue performance at WorldCom was the monthly revenue report (MonRev) which was prepared and distributed by the revenue reporting and accounting group (Vance, 2016). The MonRev included detailing revenue data from all the company’s channels and segments but the full MonRev also contained the Corporate Unallocated schedule (Vance, 2016). The key players in this fraud scheme were WorldCom’s Chief Financial Officer (CFO) and Treasurer Scott Sullivan and senior vice president of financial operations, Ron Lomenzo. Sullivan had total control for the items booked on the Corporate Unallocated schedule (Vance, 2016). The Corporate Unallocated schedule amounts reported usually spiked during the quarter-ending months, and the largest spikes occurred in quarters when the operational revenue was farther away from meeting the quarterly revenue targets (Vance, 2016). WorldCom

The Phar-Mor Inc. was founded 1982. The Phar-Mor company is located in about thirty-four states with at least 20,000 employees. However in 1992 they had to file bankruptcy due to fraud one of the biggest cases before Enron. Phar-Mor Inc. consist of fictitious inventory that were used to cover up operation losses, personal expense that Monus’s used for his World Basketball League, but he hid them in the inventory expense account for several years. He had others to help him cover up the loss, such as: CFO, the Controller and Vice President as well as the accounting manager. So this fraudulent activity of Phar-Mor was strictly top management that included the people who should have whistled blow the problem and that was the accounting firms, auditors but they helped Monus cover up the fraud for years that cause investors and employees over $500 million dollars.

The past decade has seen the discredit and collapse of various high-profile corporations across the world. These scandals were inherently the result of fraud, scams, mismanagement, fraudulent reporting and audit failure among many other deficiencies present in the corporate governance model of various syndicates. Some of these made the very foundation of the financial markets unstable and open to financial crisis. The international and national community were compelled to more efficiently address the issues of corporate fraud, misconduct of management, corruption and weak audit measures. In this paper we will focus on fraud, mainly occupational fraud, within corporations and combat mechanisms available within corporate governance. “No entity is immune from fraud. Fraud indiscriminately affects all types of organizations regardless of sector, size, or geographical location. It does not distinguish between public or private entities, by what they do, by their environmental footprint, by their level of sustainability, by their public profile, or by the number of years they have been in existence.” The consequences of fraud can prove to be dire for any organisation, from irreparable damage to reputation to possible bankruptcy. As per the Association of Certified Fraud Examiners (ACFE) Global Fraud Study 2014, survey participants estimated that the typical organization loses 5 per cent of revenues each year to fraud. If applied to the 2013 estimated Gross World