SUMMARY

Phar-Mor the discount drug store chain has the founders Michael I. Monus and David s. Sharia and the
CFO Patrick Finn running the organization with 305 stores in 33 states working with 23000 employees
was ranked as the forty ninth largest privately held companies in US. Monus a sports fan has started his
world basketball league and also was the part owner and promoter of the Colorado Rockies. Mr. Monus
spared no expense in running the league. League officials enjoyed limousine service, and the perks WBL
commissioner included a Cadillac. The Phar-Mor officers were told about a transfer of Phar-Mor funds to
the WBL in the amount of $100,000 anonymously. An internal audit examination cannot find the
$100,000 but uncovered several questionable transactions. Mr. Monus was first demoted to vice
chairman and then was fired; additionally Phar-Mor financial chief officer, Patrick Finn and the external
auditor were dismissed. David Shapira, new CEO of the company, disclosed about the fraud done by Mr.
Monus and Mr. Finn of $10 million also that they had engaged in a fraudulent scheme to cover up the
failures in the company and operating losses. The company had overstated his profits by $350 million
hence the collusion and fraud at the senior management level did not occur in a vacuum. Phar-Mor
emerged from chap 11 bankruptcies in 1995 with a new CEO, David Schwartz, and board. Phar-Mor was
have to merged with ShopKo stores in 1996 but it was acquired by Avatar in 1997

QUESTION ANSWER
Q1 List the ethical violations by the various parties at Phar-Mor

Phar-Mor funds were being transferred to WBL by Mr. Monus. Mr. Monus and Mr. Finn were engaged in
a fraudulent scheme to cover up the failures in the company and operating losses. In reality the
company had no profits for the last three years. The company had overstated his profits by $350 million.

Q2 what elements in the company allowed such a large fraud to occur?

The company was not generating the profits for last 3 years and so it increases the pressure for the
founders. He was at top level and already was overstating the profits there was no check and balance
he got the opportunity to increase his incentives by transferring funds to his world basketball league.
Collusion then occurs which spread among the no. of people that the auditing procedures failed to
uncover it.

Q3 Was the company treated as a personal asset of the officers? What problem resulted from this
attitude?

Yes the company was treated as a personal assets of the officers the problem resulted from this attitude
Was that they have overstated the profit because of which all the management was effected all the
management decisions went wrong
Q4 Suppose you had drafted the internal memo that expressed concerns about internal controls and
conflicts of interest. What would you have done if the company took no action in response? What would
you do next?

As far as no fraud or any breach of law is committed there is nothing to be reported with respect to
internal controls however the internal auditor (if required by law) may be more concerned about how
the internal control work then but as a general counselor one should establish code of ethics and guide
their employees and keep in touch with them w.r.t the ethical behavior initially, reward them, for
behaving in a particular manner and if they don’t then punish them.

Q5 if you as a Phar-Mor employee had discovered the two set of books, whom would you tell?

In the normal case if the fraud was done by the middle level manager the t should be reported to the
senior manager or the non-executive board of directors but if the senior manager is involved in the
fraud then in that case of fraud we can complain to the regulatory authority

Q6 List those who have been harmed by the collusion at Phar-Mor

The other middle level managers and employees, lower level managers, customers, consumers,
shareholders, suppliers, and other stake holders.