Founders Michael “Mickey” Monus and David Shapira perpetrated financial fraud because there was conflict of interest involved with Monus supporting a World Basketball League with Phar-Mor’s revenue. With the help of the Chief Financial Officer (CFO) Patrick “Pat” Finn $10 million was hidden in World Basketball League that Monus had founded. This was done by overstating the company’s inventory and earnings. Also, within 10 years of establishment Phar-Mor had grown to 300 stores and 25,000 employees which resulted in Phar-Mor having to borrow millions to fund this growth (Bloomberg Business.1992) The auditing firm Coopers & Lybrand was accused of failing to perform a proper GAAS audit. One strategy the auditors could have performed was to follow the trail of revenue vs expenses. The auditor should have notice large sums ($10 million) of revenue going into one particular expense (Suppliers/Inventory). Considering Phar-Mor filed that they lost money in fiscal year 1984 and 1985 and they never cleared …show more content…
• Have you been asked to perform an accounting function that you were not comfortable with? • Have you notice any one in the company living beyond their means? Monus flamboyant behavior was notice and out of place. Monus arrived to work daily in a limousine and escorted by an entourage, along with purchasing an 18,000 sq. ft. home with indoor basketball court after his first divorce. The one pattern within the data that appears to be inconsistent yet if the auditors had established an internal control systems would be Monus the founder moving so freely throughout every aspect of the company with no one checking his movements. From choosing what properties to purchase to purchasing supplies. In any company there should be segregation of duties. For example, the person making the deposits should not be the person writing the checks. Had there been stipulations made it would not have been so convenient to commit the
An “audit failure” is a situation in which a professional auditor fails to detect a material error in the financial statements of the company they are auditing. The audit failure in the situation of Rita Crundwell the failure was exacerbated by the fact that the auditors continually signed off on the misstated statements for years. Crundwell is responsible for many of the deficiencies mentioned, such as the missing funds and the incorrect invoices. However, she is not the sole person responsible for this fraud. The lack of internal control is to blame, and this cannot be placed on a single person. The government should have separated duties and used
The company’s revenues were not growing fast enough to meet these targets, so defendants instead resorted to improperly eliminating and deferring current period expenses to inflate earnings. They employed a multitude of imp roper accounting practices to achieve this objective. Among other things; the complaint charges that defendants:
Appendix A.2 also lists several factors that could provide opportunities for management/employees to commit fraud. One factor that could lead to fraud is if, “There is ineffective monitoring of management as a result of: domination of management by a single person or small group without compensating controls.” The auditors should have taken notice of the lack of controls and segregation of duties with respect to Phar-Mor’s
This course is the first in a two-part series that deals with auditing a company 's financial reports, internal controls, and
According to an article in the CPA Journal, the accounting profession has long contended that an audit conducted in accordance with generally accepted auditing standards (GAAS) provides reasonable assurance that there are no material misstatements contained within financial statements. Suggest at least two (2) alternative methods that auditors can use to provide a more concrete level of assurance to investors. Provide support for your responses with examples of such methods in use.
Phar-Mor, Inc. applied a variety of different fraudulent reporting techniques to "cook the books" and commit one of the biggest corporate frauds in American history. A number of things were done to cover up the massive losses the company was taking including issuing fake invoices for merchandise purchases, making fake journal entries in order to increase inventory and decrease cost of sales, recognizing inventory purchases but then not accruing the corresponding liability, and over-counting merchandise.
Of these transactions, most of it was not in the interest of Enron of Enron’s shareholders; such as profits and cash flows were manipulated and grossly inflated which caused misleading to the investors. AA has also failed to recognise the Generally Accepted Accounting Principle (GAAP) – which is accounting rules used to prepare, present and report financial statements for a wide variety of entities used in United States. AA also did not advise Enron’s audit committee that Enron’s CFO – Andrew Fastow – and his helpers were involved in significant conflict of interests. Enron’s politics and internal control was also found out to be inadequate to protect the shareholders interests. These should have made known and clear as these are responsibilities of an auditor. AA has also make the mistake by which it did not act upon evidence found or neither has it find any audit evidence relating to the numerous share rights transferred to SPEs and the side deals between Enron and banks which remove the banks’ risk from transactions. In auditing, audit documentations are key part to the audit processes.
It is not possible for the auditor to be 100% certain that he/she has obtained all evidence regarding all significant related party transactions, especially if management is trying to conceal something. However, the
It is possible for an auditor to come to an improper conclusion because documents, like invoices, could be easily falsified if management originally handles them or if the auditor receives them from management, like in the case of ZZZZ Best and Minkow. The auditor must always confirm payments directly with the third party.
In the case of Phar-Mor fraud, the company was involved in cover up and some accounts were created to hide the fraudulent activities. Bad inventory counts in the stores were made to help with the cover up and deceit about activities that cost hundreds of millions of dollars. (Williams, S.L., 2011)
The auditing firm has been in engagement with the company throughout the period when the fraud was being committed. One of the common and clear indicators of possible fraud was the company’s cash flow statement. The company experienced positive growth in its profits from the year 1996 through to the year 1998. However, a close analysis of the cash flow statement shows that the company had experienced negative figures of cash flow from both operating and investing activities and positive cash flow from financing activities which would not sufficiently offset the negative cash flows from operating and investing. It is therefore evident
As in the case with Enron, auditors didn’t do their jobs. In this case, the auditing company was Coopers&Lybrant. In order to realize the fraud, Mickey Monus and other had to put all their losses into expense accounts and come up with the way of boosting their asset accounts. They came up with an idea of inflating inventory. This wouldn’t be possible to do if Coopers&Lybrant wouldn’t do their job negligently. As video states, they were the lowest bid on Phar-Mor’s case, so they didn’t want to spend too much money on their audit. As a result, they checks only 4 stores out of 129. Moreover, they told Phar-Mor’s management in advance which stores will be checked.
Conclusion: As the accounting firm, Max Rothenberg & CO had an obligation to report any suspicious activity since the trust funds owned by the tenants. The accounting firm performed services more than the agreement as stated. When they discovered wrong accounting practices, they also failed to meet its moral obligations to report tenants regarding the missing money.
b. The bogus debit memos for accounts payable. – The most reliable form of evidence that the auditors could have obtained in this situation would be confirmations. The auditors should have sent confirmations to vendors, suppliers, and creditors confirming the amount that Crazy Eddie owed them. The amounts reportedly owed could then be matched with the amounts recorded in the company’s accounting records. Auditors should question any discrepancies.
The greatest opportunity for Minkow to commit fraud was ZZZZ Best’s lack of financial supervision. Lack of internal control facilitated manipulation of company’s assets and transactions. It gave the CFO the opportunity to falsify the documents and to create fictitious transactions. These transactions created formidable revenues on the company’s books and made it easy to borrow money from banks. The weak external audit was the other opportunity that allowed Minkow to commit fraud. The auditor was not familiar with the company and its related parties. In addition, the auditors placed too much trust in management produced documents and failed to verify key transactions. These two important reasons gave Minkow an opportunity to commit fraud.