Phar Mor Case

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Case 6

Phar-Mor, Inc.: Accounting Fraud, Litigation, and Auditor Liability
Mark S. Beasley, Frank A. Buckless, Steven M. Glover, Douglas F. Prawitt
LEARNING OBJECTIVES
After completing and discussing this case, you should be able to

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Identify factors contributing to an environment conducive to accounting fraud . Understand what factors may inappropriately influence the client-auditor relationship and auditor independence Understand auditor legal liability issues related to suits brought by plaintiffs under both statutory and COmmonlaw

INTRODUCTION
In December 1995, the flamboyant entrepreneur Michael "Mickey" Monus, formerly president and chief operating officer (COO) of the deep-discount retail chain PharMor, Inc., was sentenced to 19 years and seven months in prison. Monus was convicted for the accounting fraud that inflated Phar-Mor's shareholder equity by $500 million, resulted in over $1 billion in losses, and caused the bankruptcy of the twenty-eighth largest private company in the United States. The massive accounting fraud went largely undetected for nearly six years. Several members of top management confessed to, and were convicted of, financial-statement fraud. Former members of Phar-Mor management were collectively fined over $1 million, and two former Phar-Mor management employees received prison sentences. Phar-Mor's management, as well as Phar-Mor creditors and investors subsequently brought suit against Phar-Mor's independent auditors, Coopers & Lybrand LLP (Coopers), alleging Coopers was reckless in performing its audits. At the time the suits were
The case was prepared by Mark S. Beasley, Ph.D. and Frank A. Buckless, Ph.D. of North Carolina State University and Steven M. Glover, Ph.D. and Douglas F. Prawitt, Ph.D. of Brigham Young University, as a basis for class discussion. It is not intended to illustrate either effective or ineffective handling of an administrative situation. Copyright @ 2003 by Pearson Education, Inc., Upper Saddle

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