Essay on Phar-Mor Fraud

Words: 1815
Pages: 8

Phar-Mor, Inc was a thriving discount grocery store in the late 1980’s. Phar-Mor was moving product quickly but profit margins were not significant enough to pay the bills. By the early 1990’s, Phar-Mor declared bankruptcy due to fraudulent financial reporting and misappropriation of assets, making it one of the largest frauds in U.S. history. Below, we will use auditing standard AU 316.85 Appendix A in conjunction with the video “How to Steal $500 million” to analyze how incentives/pressures, opportunities, and attitudes/rationalizations allowed for fraud to start and continue at Phar-Mor.

Annual reoccurring losses due to small margins put pressure on the CFO and controller to divide the overall loss
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The Appendix also states that fraud opportunities could arise if “Internal controls components are deficient as a result of: inadequate monitoring of controls.” Obviously in the case of Phar-Mor, the internal controls were deficient. The monitoring of controls was woefully inadequate which allowed for the president and others to continue perpetrating the fraud for years.

One of the reasons that Phar-Mor was able to commit such a substantial amount of fraud for as long as it did was its business model was highly unique and perhaps not well understood. The more “complex” a company is, and the harder it is to understand, the easier it will be for said company to commit fraud.

The CFO, accounting manager, and controller were all presented with “opportunities” to perpetrate the fraud, simply due to the fact that the president himself instructed them to misstate the financial statements, or simply “go along with it.” However, it was the lack of internal controls that provided the opportunity for the president to initiate the fraud in the first place.

As noted in Appendix A of AU 316, the “risk factors reflective of attitudes/rationalizations by board members, management, or employees, that allow them to engage in and/or justify fraudulent financial reporting, may not be susceptible to observation by the auditor. Nevertheless, the auditor who becomes aware of the existence of