Phar-Mor Fraud
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.
Incentives/Pressures
Annual reoccurring losses due to small margins put pressure on the CFO and controller to divide the overall loss incurred by Phar-Mor upon each of the individual stores, making the dollar amount of loss per store appear much less material than the millions actually incurred. Phar-Mor’s threat of facing bankruptcy was an incentive for the president, CFO, accounting manager and controller to find ways to “cook the books”, such as overstating the price of inventory.
Each character involved had significant incentive and felt a lot of pressure to allow the fraud to continue. At one part in the documentary, the controller for Phar-Mor even stated that he, “feared physical harm,” should he not go along with the fraud.
It was the president, who was the one who initially decided not to post the losses, but told his CFO and controller to hide the company’s losses in a separate subledger while continuing to tell the CEO and board members that the company was in good financial standing. 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. Appendix A.2 of AU 316 lists several factors that incentivize and pressure employees into committing fraud. It states that if “Financial stability or profitability is threatened by economic, industry, or entity
Incentives/Pressures
Annual reoccurring losses due to small margins put pressure on the CFO and controller to divide the overall loss incurred by Phar-Mor upon each of the individual stores, making the dollar amount of loss per store appear much less material than the millions actually incurred. Phar-Mor’s threat of facing bankruptcy was an incentive for the president, CFO, accounting manager and controller to find ways to “cook the books”, such as overstating the price of inventory.
Each character involved had significant incentive and felt a lot of pressure to allow the fraud to continue. At one part in the documentary, the controller for Phar-Mor even stated that he, “feared physical harm,” should he not go along with the fraud.
It was the president, who was the one who initially decided not to post the losses, but told his CFO and controller to hide the company’s losses in a separate subledger while continuing to tell the CEO and board members that the company was in good financial standing. 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. Appendix A.2 of AU 316 lists several factors that incentivize and pressure employees into committing fraud. It states that if “Financial stability or profitability is threatened by economic, industry, or entity