SUMMARY

Phar-Mor, the discount drug store that had enjoyed a decade of phenomenal financial success. It started with 15
stores and grew to over 310 stores in thirty two states from 1982 to 1992 it sales grew to $3 billion. At first Phar-
Mor was seen as a major prospect in the retail market. The president, founder, and COO of Phar-Mor was Mickey
Monus, who became quite extravagant with his money as Phar-Mor grew. The key to the companys success was a
power buying a phrase coined by Mr. Monus, it was a practice of stocking up on the products when suppliers where
offering rock-bottom prices. This practice was indeed a key practice that attracted many prices conscious consumers
and led to the company rapid success. However, the deep discount prices were so low that eventually Phar-Mor was
no longer able to turn up a profit. In fact, it is believed that there were no profits generated after 1987. This is how
the problem began, because Monus and other executives did not want the truth about their losses to damage the
success and favorable reputation of Phar-Mor, they began to use imaginative accounting practices to hide their
losses on the financial statements. At last Phar-Mor emerged from chapter 11 bankruptcies in 1995 with a new CEO,
David Schwartz, and board.

ANSWERS
Ans 1: Mr. Monus set up a complex web of companies to do business with Phar-Mor. These companies
received million from Phar-Mor. There were reported to be 91 related parties the complexity of these
companies made it very difficult for coopers & Lybrand to detect. A number of things were done to cover
up the massive losses the company was taking including issuing false invoices for merchandise purchases,
making fake journal entries in order to increase the inventory and decrease cost of sales, recognizing
inventory purchases but then not accruing the corresponding liability, and over-counting merchandise.

Ans 2: Apparently Phar-Mor had a very inefficient information management system. All attempts to
improve these systems were shot down by high ranking officials involved in the fraud. Secondly there were
no controls in place for the duties of accounts payable. Individuals involved in the fraud had check for two
different bank accounts that they used for disbursements.

Ans 3: Yes the company has been treated as a personal asset of the officers as Mr. Shapira said that about
$10 million in Phar-Mor funds had been funneled to the WBL. Mr. Shapira also stated that Mr. Finn and
Mr. Monus had engaged in a fraudulent scheme to cover up failures in the company and operating losses.
As a result the company faced massive losses.

Ans 4: First of all I would warn them and if they dont show their interest I simply inform the court by
providing the internal memo that we had drafted so that court can take severe actions against them.
Ans 5: If I had discovered the two sets of book I would inform my HOD so that he can inform to the senior
management about the two sets of books.
Ans 6: The fraud and all the misstatements were conducted by several members at the executive level and
other employees in the accounting department. The major groups that are directly affected are investors,
suppliers and employees.