Essay about Phar Mor Inc Case Study

Another outcome of the law is, Public Company Accounting Oversight Board (PCAOB), a public agency was created .This agency act as auditors of the public company .Their area of work is overseeing, regulating and inspecting accounting firms. The act also deals with issues such as auditor independence, internal control assessment, corporate governance and enhanced financial disclosure. The non-profit arm of Financial Executives International, Financial Executive Research Foundation completed a thorough research studies to help support in the foundation of the

The organizational structure of Phar-Mor was ineffective and lacked many control activities including: segregation of duties, authorization, documentary and IT controls. As a result, Phar-Mor’s president had a stronghold on certain upper level management and executives which gave him the opportunity to control the fraud and hide it from other members of the organization and supposedly Phar-Mor’s auditors, Coopers and Lybrand LLP.

The auditing firm Coopers & Lybrand was accused of failing to perform a proper GAAS audit. One strategy the auditors could have performed was to follow the trail of revenue vs expenses. The auditor should have notice large sums ($10 million) of revenue going into one particular expense (Suppliers/Inventory). Considering Phar-Mor filed that they lost money in fiscal year 1984 and 1985 and they never cleared

As indicated by PCAOB, the written representation cannot be a substitute for substantive procedures. Thus, auditors did not perform adequate procedures to test the management’s estimates. What’s more, inquires were heavily relied on the management’s integrity. Auditors ignored the professional skepticism. Finally, the 30 years and 15 years useful lives, which were adopted previously by Little Drummer, were not appropriately audited. Since the engagement team did not contact the predecessor auditors, the team did not get any audit documents from predecessor auditors regarding the assumptions of 30 years and 15 years. There was no evidence to show the reasonableness of these two assumptions.

Enron began as a pipeline company in Houston in 1985. It profited by promising to deliver so many cubic feet to a particular utility or business on a particular day at a market price.

Since their prices were way too low, eventually profit margins began to decline very fast, this resulted in millions of losses. Instead of disclosing and recording these losses, President Monus along with the CFO Pat Finn and two other high ranking officials, decided to cross out the correct numbers insert highly inflated numbers, during this a sub ledger with the real numbers was also being kept. After a few months of this practice Pat Finn the CFO took on the responsibility of altering the numbers. By mid 1990 Monus's refusal to raise prices led to even more cover ups and eventually more members of the organization began to get involved in the fake reporting including the manager of accounting and the Controller. By the time the fraud was discovered executives at Phar-Mor had misstated financial statements by over $500 million.

Exceptions can be approved by the Board and are made in cases where the revenue paid for such services contributes less than 5% of revenues paid to the auditing firm. Also, a public accounting firm may provide these non-audit services along with audit services if it is pre-approved by the audit committee of the public company. The audit committee will disclose to investors in periodic reports its decision to approve the performance of non-audit services and audit services by the same accounting firm. This requirement to disclose to investors is likely to inhibit auditing committees from approving the performance of auditing and non-auditing services by the same accounting firm. Other sections outline audit partner rotations, accounting firm reporting procedures, and executive officer independence. Specifically, subsection 206 states that the CEO, Controller, CFO, Chief Accounting Officer or similarly positioned employees cannot have been employed by the company's audit firm for one year prior to the audit.

Section 201 prohibits any registered public accounting firm from providing the following non-audit services to audit clients: “bookkeeping or other services related to the accounting records, financial info systems design or implementation, appraisal or valuation services, fairness opinions, actuarial services, internal audit outsourcing services, management functions or human resources, broker or dealer investment advisor or investment banking services, legal services and expert services unrelated to the audit, any other service the board determines impermissible” (Sarbanes-Oxley Act, 2002). Section 202 requires the issuer’s audit committee to preapprove all auditing and non-auditing services that will be provided to the issuer (Philipp, CPA, & CGMA, 2014). Section 203 establishes mandatory and substantive rotation of audit partner and partner responsible for review of the audit every 5 years (Philipp, CPA, & CGMA, 2014). Section 204 needs the public accounting firm to report to the audit committee such as “critical accounting policies and practices, alternative accounting treatments within GAAP discussed with management and material written communications between auditor’s firm and management of the issuer” (Philipp, CPA, & CGMA, 2014). Section 206 prohibits the public accounting firm from providing audit services for the issuer if the CEO, CFO, CAO or any person serving in the equivalent capacity of

The Sarbanes-Oxley Act has many provisions. A few of the major provisions include the creation of the Public Company Oversight Board (PCAOB), Section 201, 203, 204, 302, 404, 809, 902, and 906. The PCAOB was the first true oversight of the accounting industry. It oversees and creates regulations, and it will monitor and investigate audits and auditors of public companies. The PCAOB has the authority to sanction firms and individuals for violations of laws, regulations, and rules. Section 302 requires the CEO and CFO to certify that they reviewed the financial statements, and that they are presented fairly. Section 404 requires management to state whether internal control procedures are adequate and effective, and requires an auditor to attest to the accuracy of the statement. Section 902 states that “It is a crime for any person to corruptly alter, destroy, mutilate, or conceal any document with the intent to impair the object’s integrity or availability for use in an official

In the case of Phar-Mor fraud, the company was involved in cover up and some accounts were created to hide the fraudulent activities. Bad inventory counts in the stores were made to help with the cover up and deceit about activities that cost hundreds of millions of dollars. (Williams, S.L., 2011)

The successor auditor is the auditor who is considering accepting or has already accepted engagement with the new firm. Communication between the predecessor and the successor is important. This information can bring about many issues such as “the predecessor auditor and the client may have disagreed about accounting principles, auditing procedures, or similarly significant matters” (PCAOBUS.org, 2013). The successor auditor should initiate the communication with the predecessor. The reason behind the successor auditor initiating the communication is to obtain valuable information that can lead to whether or not they should accept the engagement. The successor auditor may only request reasonable information to the predecessor auditor pertaining integrity of management, disagreements in accounting principles, auditing procedures, and or other significant matters. In addition, successor auditor can establish communication with audit committees or other with equivalent authority regarding “fraud, illegal acts by clients, and internal control related matters” (PCAOBUS.org, 2013). There are laws of confidentiality that the predecessor must abide by. The predecessor must maintain confidentiality at all times. Due to this confidentiality laws

Phar-Mor Inc. fell prey to greed from the top. Unfortunately, the auditing firm assisted the organization with the conspiracy to defraud the users of financial reporting, the government, and the stakeholders. The chief officers used the funds for personal usage and appropriated funds to functions that were not related to the organization business. The financial statements were riddled with material misstatements and fraud acts of theft were blatant. For example, the senior financial officers including the CEO grossly over stated inventory to hide losses.

|Company policy requires former senior manager level (or higher) employees of our outside auditor to wait three years before being eligible |

3. What potential implications arise for the accounting firm if they issue an unqualified report without the going-concern explanatory paragraph?

The reason for the predecessor-successor auditor correspondence is to advise the successor auditor of the way of the business and particular ascribes of the customer to figure out whether the successor auditor needs to go up against them as a customer. It is the obligation of the successor auditor, with the consent of the client, to start correspondence with the predecessor auditor. The successor auditor needs to gather data on if there are any regions to give careful consideration to that are more inclined to misreports, the proficiency/adequacy of internal controls and if there is anything particular to run over with the administration or management of the company, how is the relationship with administration/ management of the company, if in case that they are consistent, and possibly most imperative, the main reason behind the switch.