Phar mor fraud case

Summarize the case and answer the following questions:

1. Could SOX have prevented the Phar-Mor fraud? How? Which specific sections ofSOX?

2. Research the Waste Management scandal from the late 1990’s. Describe the scandal. Could SOX have prevented this scandal?

3. Research the Enron scandal from the early 2000’s. Describe the scandal. Could SOX have prevented this scandal?R E S P O N S I B I L I T I E S & L E A D E R S H I P fraud The Case of Phar-Mor Inc. Could SOX Have Prevented the Fraud? By S. Lansing Williams T he Sarbanes-Oxley Act of 2002 (SOX) was an effort to increase the confidence of investors after a number of high-profile corporate failures due to malfeasance on the part of corporate officers and poor internal controls. After the failures of Enron. WorldCom, and other large companies— which resulted in huge losses to investors—Senator Paul Sarbanes (D-Md.) and Representative Michael Oxley (R-Ohio) coauthored a bill that resulted in public companies improving the accuracy of their financial reports. The law contains 11 major sections, including (Title I) Public Company Accounting Oversight Board, (Title II) Auditor Independence, (Title III) Corporate 58 Responsibility. (Title FV) Enhanced Financial Disclosures. (Title V) Analy.st Conflicts of Interest, and (Title VI) Commission Resources and Authority. Titles VII, VIII, IX, X, and XI deal with sUidies and reports, corporate and criminal fraud accountability and white-collar crime penalties, corporate tax retums, and corporate fraud and accountability. While SOX came about as a direct result of the Enron meltdown in 2001, followed by the WoridCom bankruptcy in 2002, these two companies were not the only failures that led to its passage. The 1992 bankruptcy of Phar-Mor Inc. cost its investors $500 million. Although the bankruptcy occurred 10 years SEPTEMBER 2011 / THE CPA JOURNAL prior to the enactment of SOX, this article attempts, with hindsight, to determine if the bankniptcy might have been prevented if the provisions of SOX bad been in effect and applied to Phar-Mor Inc. Background Phar-Mor Inc., a deep discount drugstore chain, came into existence in 1982 as an affiliate of family-owned grocery chain Giant Eagle, which also owned a distribution company. Tánico Distributors Co. The deep discount concept consisted of using "pt)wer buying," or purchasing the largest possible amount of product at tbe best terms, then selling at discounts of up to 25%-40% off retail prices. The then vice-president of Tamco, Michael J. "Mickey" Monus. was named president of the new company. Phar-Mor had grown to 70 stores by 1987 and saw further expansion, reaching 200 stores in 1990; by 1992, it reachetl 310 outlets with 25,000 employees in 34 states (www. I undinguni verse.com/company-histories/ PhaiMor-Inc-Coinpany-History.html). The first indication of financial problems came to light in 1988, when investigation of lower-than-expected profit margins revealed that Phar-Mor was being billed for inventory it had not received Irom its sister company, Tamco, a primary supplier. Because Phar-Mor did not maintain receiving records of its purchases from Tamco, it was impossible to substantiate products received. At the same time, Tamco's records were equally pcx)r. A formal analysis of the shortage by a Phar-Mor accountant indicated that tbe inventory shortage/overbilling was around $4 million; bowever, the two subsidiaries of Giant Eagle settled on $7 million, giving Phar-Mor a $2 million profit for the year. It is interesting to note that the settlement resulted in a nearly identical gross margin as the prior year (David M. Cottrell and Steven M. Glover, "Finding Auditors Liable for Fraud," The CPA Journal, July 1997). While not on the radar for several years, another source of problems for Phar-Mor began with the formation of the World Basketball League (WBL) in 1987. Monus owned at least 60% of each of the 10 teiuiis and wasrespwasiblefor that portion of each team's losses, which a fellow investor in the WBL told a Cleveland Plain Dealer SEPTEMBER 2011 / THE CPA JOURNAL reponer averaged $13,000 per game, or $7,800 for Monus's share (www.funding universe.com).