Phar-Mor Fraud Case Study

In order for the fraud to be successful, it was imperative that the fraud be concealed from the auditors. Being that the bulk of key personnel concerned with the fraud were former auditors for Coopers, this was not hard to attain. These employees knew the audit planning strategies that would be implemented. Coopers historically did not perform audit testing of zero balance accounts, this would mean the “bucket-account” used to hide personal expenses would not be reviewed by the auditors. Coopers also gave Phar-Mor advanced knowledge of the stores where they would observe physical inventory counts for the annual audit. This lead to increase fictitious inventory levels at stores that would not be observed. Although Phar-Mor executives took extreme …show more content…
Cherelstein, Phar-Mor Controller, also would not have been able to accept employment under the SOX act. It is hard to say whether the prevention of Cherelstein’s employment would have prevented the fraud. The other Phar-Mor employees that were previous Cooper auditors met the one year stipulation and still contributed to the fraud. Corporate management is responsible for providing an assessment of internal controls as part of the yearend audit regarding the effectiveness of internal controls. SOX section 406 states that a strong Code of Ethics should be put in place and adhered to by senior financial officers. Phar-Mor fraud was carefully carried out by corporate management and executive from the very top. It is extremely improbable that the SOX standards described above would have been effective in detecting the fraud. If the corporate management was willing to steal and lie to cover up fraud, then it’s doubtful they would have complied with the SOX requirements either. For myself, the only hope this case would have even under SOX would be that a new audit firm required under the audit rotation policy would have implemented different testing