A total of 90 points are available for the actual responses to the questions and 10 points are available for presentation, clarity and grammar. Monus transferred his boundless energy from the court to the board room. Reform accounting, financial reporting, and auditing functions of companies that are publicly traded. Monus during the trial that ended yesterday. Phar-Mor became well known for offering medications at a 25-40% discount rate compared to your normal pharmacy store prices.
Please place the order on the website to order your own originally done case solution. When employees make rationalizations related to committing fraud, an auditor will have a hard time detecting the fraud because the employee will do everything in their power not to get caught. Had the auditors examined the tax returns of the principals which they did not the scheme would have been obvious. Figuring the unit cost of inventory can be problematic, too; Fifo, Lifo, average cost and other valuation methods can routinely make a material difference in what the final inventory is worth. Phar-Mor, based in Youngstown, Ohio, sought Chapter 11 bankruptcy protection from its creditors in August 1992, after accusing three of its former executives, including Mr. . To detect these problems, auditors should interview manufacturing process personnel to gain an understanding of appropriate charges to inventory.
He acquired a single drugstore in Youngstown, Ohio, and within 10 years he had bought 299 more stores and formed the national chain Phar-Mor. The auditors negligently used their resources and did not perform adequate procedures that should have allowed them to detect fraud. Third, we must commit the resources necessary to find solutions that work. Or the Waste Management scandal which did things such as capitalizing items which should have…. Attempted to make the actual net income match the budgeted amounts. If you strip economic crime of its multitudinous variations, there are but three ways a victim can be unlawfully separated from money: by force, stealth or trickery.
If the vendors knew that Phar-Mor was experiencing losses too big to recoup, they would pull their line from Phar-Mor locations and that would spell the end to Phar-Mor. Perhaps, they just believed in their client—they read the newspaper articles and watched the television spots on the hard-driving Monus and bought the hype. Each character involved had significant incentive and felt a lot of pressure to allow the fraud to continue. Identify factors contributing to an environment conducive to accounting fraud. Maintain a system of information technology controls The Sarbanes-Oxley act was passed in 2002 as a Congress's response to the many situations of fraudulent financial reporting discovered during 2001. Cost of goods sold on the books not agreeing with tax returns.
There are but two ways that this can be accomplished. So when a potential fraud offender thinks he or she can commit a crime and get away with it, that assessment usually is correct. Corporate insiders have a fiduciary duty to act in the best interests of the shareholders. Rather than using their talents exclusively to investigate allegations of fraud once they have been reported, antifraud specialists also should be involved during the audit itself to help identify key risk areas, which then can be furnished to the auditors for further consideration. Association of Certified Fraud Examiners.
This is just a sample partial case solution. Goods are constantly being bought and sold, transferred among locations and added during a manufacturing process. Thereafter, the client can add phony inventory to the items not tested. Fraud will always be an issue but it has been more prevalence in the past before there were any specific guidelines for business entities and accountants to adhere and conform to. Understand what factors may inappropriately influence the client-auditor relationship and auditor independence Understand auditor legal liability issues related to suits brought… 1433 Words 6 Pages The Case of Phar-Mor Inc.
His attitude and disregard for internal controls by continually overriding transactions scared the employees involved with the fraud. The president felt significant pressure as the business model was his, and the simple notion of pride can sometimes propel people to do the wrong thing. Nevertheless, the auditor who becomes aware of the existence of such information should consider it in identifying the risks of material misstatement arising from fraudulent financial reporting. The fraud was conducted by the owner of the company, Mickey Monus and the whole management of the was involved in it. Besides internal control, what factors go into preventing fraud? Considering my background, it might be expected that I would advocate the use of antifraud experts on audits. What is society to do, then, about the current wave of fraud that seems to have engulfed us? But with limited talents and height five foot nine on a good day he would never play on a professional team.
First, it would make it more difficult for insiders to conceal ill-gotten gain. Prosecution of offenders, although necessary in a civilized society is akin—as we might say here in Texas—to closing the barn door after the horses are gone. As a result, the complex inventory account is an attractive target for fraud. Finn was sentenced to 33 months in prison for his role in the embezzlement scheme. The intention of the Act was: A. If they have been auditing the company for a while, they know how the company works and ways to improve the internal audit process. Obviously, all those involved realized that Phar-Mor would not be able to remain in business should they report the losses.
Two ideas are worth debating now: the use of antifraud specialists on public audits, and financial transparency for executives. The auditor who assesses both motive and opportunity to commit material inventory fraud will end up spotting the ghosts. Second, financial transparency could be a significant and powerful deterrent. As time went on, several of those involved still felt that there were ways to fix the problem, but eventually it got to the point where most realized that it was a lost cause. Personal traits and characteristics of executives and employees. An alert auditor can detect these schemes by any one of the analytical methods described above and also can examine the cash disbursements subsequent to the end of the period.
Sorry, but copying text is forbidden on this website! Those who are sufficiently motivated to override or circumvent them usually can find a way. On May 12, Phar-Mor Inc. By 1987 Phar-Mor almost had 100 stores and was expanding even more rapidly at this point. And the reasons have little to do with accounting controls. He had far too much control and was able to perform his duties without any internal controls to limit his ability to affect the financial statements. For each assertion, explain why it is important and how the auditors could have tested it. Regrettably, under our system of justice, there is nothing certain about being punished.