Phar Mor Inc Case Study

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Sean Russi

The Case of Phar-Mor Inc

ACCT-525

October 31, 2012

Case Summary

The case of Phar-Mor Inc was one of the biggest pre-Enron frauds that have been uncovered. Phar-Mor Inc established in 1982 Phar-Mor was a small little known discount drugstore. Phar-Mor became well known for offering medications at a 25-40% discount rate compared to your normal pharmacy store prices. Phar-Mor’s first six years of existence seemingly were fraud free and saw the company grow at a decent pace for their field. By 1987 Phar-Mor almost had 100 stores and was expanding even more rapidly at this point.

The first hint of fraud came up and was discovered being a billing type scheme involving un-received inventory. On top of which it was not policy at the time for Phar-Mor to keep receiving records so there was no way to track it back to the company supposedly shipping in the inventory. The inventory incident ended up costing Phar-Mor seven million dollars and instead of reporting a nine million dollar profit they reported a two million dollar profit.

The other problem that Phar-Mor was suffering from unknown to most of the top staff at the company and investors was the President Michael J. Monus had invested in the World Basketball League and was a 60% owner of the WBL. The problem was Monus was losing over seven thousand dollars per night the league was in operation so to cover losses Monus was taking money from Phar-Mor to cover the WBL losses. On top of that Monus had also taken out 200,000 dollars to improve his personal home.

Phar-Mor was able to cover up the losses by using what they considered a “bucket account” and would move all fraudulent activities thru that account because they were aware that the auditors would not look at any account that had a zero balance. So by moving fraudulent activity thru this “bucket account” the other accounts showed zero balances and the auditors didn’t bother...
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