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 company’s 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...
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