Accounting and Financial Statements (Ethics)
Ohio in the mid 1990’s that didn’t receive nearly the attention.
Phar-Mor
Phar-Mor Incorporated was a discount retailer based in Youngstown, Ohio. The company revolved around a purchasing strategy known as power buying. This allowed Phar-Mor to purchase inventory at a great discount compared to competitors. For the first few years, Phar-Mor was extremely profitable, but that would soon change. The Phar-Mor fraud commenced at the desk of President and Chief Operating Officer, Mickey Monus. Monus was an entrepreneur and gambler by nature. He was focused on the rapid growth of Phar-Mor at any cost. He also had a special talent in persuading people to believe in him. Above Monus was the CEO, David Shapira. It’s not entirely clear how much knowledge of the fraud Shapira had, but it is obvious that he did turn his head to critical evidence during the fraud. Other important player’s included Patrick Finn (CFO), Stanley Cherelstein (Controller), and John Anderson (Accounting Manager).
The fraud began as a small cancer in a rapidly growing company. This cancer quickly metastasized into a 500 million dollar fraud in less than a decade. Phar-Mor’s problems began with their corporate strategy to compete with the major player’s in the deep discounting retail industry. Under Monus, Phar-Mor refused to be undersold on price, even if they were losing money. This desire to sell at the lowest price, regardless of profit explains how Phar-Mor had an operating loss in spite of tremendous sales revenue. When Patrick Finn was faced with this loss he immediately went to Monus. At this time, Monus was able to convince Finn that the only course of action to take was to change the loss into a profit, as that would give him the time he needed to correct the operating problems. Monus would go out to its vendors and demand exclusivity fees to help cover the losses. In the meantime, the fraudulent financial reporting was simple, change the internal financial reports to numbers that agreed with what people wanted to see. The weekly losses became profitable numbers and John Anderson would keep the real numbers in a subsidiary ledger. As long as Shapira was seeing good numbers in black ink, he let Monus run the operations. These losses compounded over time, and when Coopers and Lybrand came to audit, Phar-Mar was 12 million dollars short. Phar-Mor would continue to knowingly provide fraudulent financial data on a weekly basis, even as the fraud grew into the hundreds of millions of dollars.
Phar-Mar was not only providing fraudulent financial statements, but there was also gross misappropriation of assets. Monus was living an extravagant and lavish lifestyle on the deceitful success of Phar-Mor. He built a new wing on his house, financed community events, and took frequent trips to Las Vegas where executives would gamble away Phar-Mor money. He then started his own basketball league [next page]