Phar-Mor Summary
Phar-Mor, Inc.
Key Facts
• Started in 1982 with 1 store. Up to 310 stores in 1992 with sales of $3 billion • Retail drug store- highly competitive, deep discounts • Mickey Monus, president and COO, found guilty of embezzling $10 million in 1995 • Monus had an extravagant life style • Sentenced to 20 years in prison • Monus and Patrick Finn his CFO • Manipulated I.S. accounts (understate cost of goods sold and overstated inventory) for 6 years • Inventory went from $11 million in 1989 to $153 million in 1991!! • Investors lost over $1.1 billion after Stk. Equity overstated by $500 million. • Problems: Poor MIS, poor internal control (bypass accounts payable controls by having a supply of blank checks), hands off management style of CFO, inadequate internal auditing, collusion among upper management, and existence of related parties • Fraud team included several former auditors from C & L who knew what the auditors were looking for and were thus able to hide the fraud • Fraud was discovered when a travel agent received a Phar-Mor check for World Basketball League expenses and signed by Monus (Monus was the founder of the World Basketball League) • Travel agent showed check to her landlord who was a Phar-Mor investor. Landlord called Phar-Mor CEO • Fraud resulted in the closing of 200 stores, laying off of 16,000 employees, and filing for bankruptcy • Emerged from bankruptcy. Now 106 stores in 19 states • Coopers & Lybrand sued by Phar-Mor, creditors, and investors for over $1 billion claiming that C & L was careless in performing its audits • Settled in late 1995 with most plaintiffs- terms not disclosed • Several plaintiffs did not settle until February 1996. Court found C & L guilty of having a “knowing or reckless disregard for material problems in the condition of Phar-Mor (equal to fraud).
Issues • Audit Failure • Objective of an audit- fairness of
Key Facts
• Started in 1982 with 1 store. Up to 310 stores in 1992 with sales of $3 billion • Retail drug store- highly competitive, deep discounts • Mickey Monus, president and COO, found guilty of embezzling $10 million in 1995 • Monus had an extravagant life style • Sentenced to 20 years in prison • Monus and Patrick Finn his CFO • Manipulated I.S. accounts (understate cost of goods sold and overstated inventory) for 6 years • Inventory went from $11 million in 1989 to $153 million in 1991!! • Investors lost over $1.1 billion after Stk. Equity overstated by $500 million. • Problems: Poor MIS, poor internal control (bypass accounts payable controls by having a supply of blank checks), hands off management style of CFO, inadequate internal auditing, collusion among upper management, and existence of related parties • Fraud team included several former auditors from C & L who knew what the auditors were looking for and were thus able to hide the fraud • Fraud was discovered when a travel agent received a Phar-Mor check for World Basketball League expenses and signed by Monus (Monus was the founder of the World Basketball League) • Travel agent showed check to her landlord who was a Phar-Mor investor. Landlord called Phar-Mor CEO • Fraud resulted in the closing of 200 stores, laying off of 16,000 employees, and filing for bankruptcy • Emerged from bankruptcy. Now 106 stores in 19 states • Coopers & Lybrand sued by Phar-Mor, creditors, and investors for over $1 billion claiming that C & L was careless in performing its audits • Settled in late 1995 with most plaintiffs- terms not disclosed • Several plaintiffs did not settle until February 1996. Court found C & L guilty of having a “knowing or reckless disregard for material problems in the condition of Phar-Mor (equal to fraud).
Issues • Audit Failure • Objective of an audit- fairness of