Hello everyone, Need help to rephrase in own words the assignment already written.

The Case of Phar-Mor Inc

Thank you in advance.

Abstract The problem to be investigated is the adoption of the new law and its effectiveness, which limits violations and fraudulent operations in the field of accounting and finance. The financial world since its appearance until today is filled with situations of non-compliance with rules and breach of trust: inflated profits, corruption, fraud, embezzlement, etc... The honesty in this area has become a rare coin, given the imaginary figures and transactions by firms, as well as fees received by financial service firms. After numerous financial scandals, the American congress voted in favor of a new law called "Sarbanes-Oxley" in 2002 to rectify the situation and restore confidence among all stakeholders (investors, firms, government ...) This law has focused on ethics by implementing a code deontology for professionals. In this article, the author examines the case "The case of Phar-Mor .Inc." and the effect of SOX if it were adopted years before. The Phase - Mor Inc.: is a discount drugstore founded in 1982. Its business consists in buying the largest possible amount of inventory to get the best price and then sell these products in the stores with the 25%- 40% off the retail prices. The president of this company was Michael J. \"Mickey\" Monus who grew the company by 240 stores from 1987 to 1992. Then the business came to a law point its gains so the executives put together a plan to show for apperences purpose that the company was performingat the same leveluntil they were discovered, cause travel agent received payment of $80,000 for a delinquent check issued to Pha - Mor Inc; curious about this issue, the travel agent asked a friend to place an inquiry about this issue to a Pha - Mor's outside counselor, which happened to be the brother a chief financial officer David Shapira and he began to do a lot of questions resulting in a $500 million accounting fraud. Week 1 AssignmentThe Case of Phar-Mor Inc The Phase - Mor Inc.: is a drugstore established in 1982 and it was related to Giant Eagle, a family owned grocery chain. The president of this company was Michael J. \"Mickey\" Monus who increase 240 stores from 1987 to 1992. Then the business came to a law point its gains so the executives put together a plan to show for apperences purpose that the company was performing at the same leveluntil they were discovered one travel agent issued delinquent World Basketball League with a check issued b Pha - Mor Inc; curious about this issue, the travel agent asked a friend to place an inquiry about this issue to a Pha - Mor's outside counselor, which happened to be the brother a chief financial officer David Shapira and he began to do a lot of questions resulting in a $500 million accounting fraud. a) In 1998 Phar- Mor presented lower margin of profit than expected then Munos had phar - Mpr liability increased as a result of inventory purchased billed and never received from Tamco, his sister company. These purchases were impossible to prove; Phar -Mor did not keep records of its transactions with its related companies. This means Phar -Mor commited fraud by issuing take inventory invoices while lacking the records to increase the inventory to show more sales but Phar-mor did not record the liability so Phar-mor decreased the cost of sales reclassified as an asset in the balance sheet. In addition, Pharmor over counted the inventories amount. Monus and his allies kept the records with the real number in a separated ledger and all the adjustment made to the books were recorder against a bucket account that was never checked by the auditors. As a result the inventories were over valuated and over counted, and if the auditors found a discrepancy, Monus would clear the difference against the bucket account which at the end of the year it was allocated to an inventory of a specific store that was not audited. b) Monus kept on going by poorly applying the internal controls and using a non-accurate information system which left open a perfect opportunity to make the fraud. In order to be successful with this plan, Monus disbanded the audit department when they began to tell him to install stronger internal controls; also he limited the accounting department access to himself and other high executives although Phar-Mor had an audit committee. c) Monus created the World Basketball League in 1987 and he owns 60% of each one of the 10 teams which had losses that had to be allocated to Munos. He embezzled about 15 million from Phar-mor to support this league plus $200,000 to renovate his personal residence and purchase meals at the country club. All these expenses were also recorded against the bucket account. Participants in the fraud: Monus President Patrick Finn Chief Financial Officer a former Coopers & Lybrand Auditor. Jeffrey Walley vice president of finance a former Coopers & Lybrand Auditor. Stanley Cherelstein, controller a former Coopers & Lybrand Auditor and John Anderson, accounting manager hired right out of Youngstown State University. How Sox provisions could have prevented the Phar-Mor Specifics sections Sox's provisions could have prevented the Phar-mor fraud because they were made with the objective of avoiding accounting errors and fraudulent practices and assuring the accuracy of the disclosures necessary to understand the financial statements. If the company had followed the following Sox's provisions, the fraud could have been avoided: Title II Section 203 Audit partner rotation: Many firms have several many letters asking to eliminate this section. In my personal experience I haves been in cases where in the rotation of auditors I found small situations passed or not seen by other personnel for example in this case the new auditor would not ignore accounts with zero balance. My conclusion is that rotation of personnel benefits the independence of the auditors. Title II Section 206: That is why this section exists to avoid those existential problems and use the employee's knowledge to cover the fraud. If Phar-Mor had applied this rule and it had not hired their former auditors the situation would have been avoided because it is more difficult to explain the situation to a newly hired CFO or Financial Director and press them work in those circumstances so it is my thinking that Monus would not have been able do the fraud. I want to add that from my point of view the auditors were negligent in not discovering the fraud although the objective of external audit is not to discover a fraud instead it is to give an opinion about the reasonability of the financial statements made under GAAP but when auditors applying standard audit procedures and do find some fraud it is their obligation to report it to the authorities. In this case if the auditors would have applied the standard audit process in the correct manners such as not telling Phar- mor weeks in advance which stores were going to be observed to audit the physical inventory and only observe more than 4 of the 300 stores and audit the accounts with zero balance with material transactions during the year and the golden rule in accounting which is a full in detail review of all suspended or bucket accounts then they would have discovered the fraud or at least suspect that something was happening. Title III Section 302 Corporate Responsibility for financial reports.. If this provision would had existed then Monus had the responsibility to have an internal audit department and he would have followed their recommendations to avoid all this fraud or inaccuracy situations. As a consequence under the practice of the SOX provision Monus would not be able to disband the internal audit department so he would not be able to suspend the practice of internal controls. Title IV Section 404 Management Assessment of internal control:. To synthesize, I have two assumptions of possible outcomes: a) the fraud would had stopped because they have to have internal control or the auditors were going to have to disclose to the SEC that the company does not have internal controls or b) Finn would have forged all the documents required by them. Title IV Section 406 Code of ethics for senior financial officers: under this provision the company is obligated to have ethic codes for its senior financial officer who means for example honest and ethical conduct, ethical handling behavior in managing conflicts between personal and professional relationships. As I have stated previously the management covered up the fraud in several instances which shows that the company did not have any kind of ethic codes and violated this section. If this provision would had been in place at that time the auditors would had ask for the ethics code but I am not sure if the management would had adhere to it. Ethical behavior is something that is very personal and comes from within; maybe Munos would have come with other tricks to bypass this provision. 1) Waste Management Case 1990 : Waste management is a for-profit waste management company with headquarters in Houston, its operations consist of: waste collection and transfer, recycling and resource recovery, and waste disposal for residential, commercial, industrial and municipal customers in North America. With the entrance of a new CEO, he ordered a review of the company's accounting practices. He discovered that the top executives and their auditor partner in Arthur Andersen had misstated pretax earnings by more than $1.7 B. How the fraud was perpetrated: The revenues were not growing as the executives hopes to meet the earnings target so they decided along whit Arthur Andersen partner to inflated earnings: a) \"Refused to record expenses necessaries to write off the cost of unsuccessful and abandoned landfill to decrease the value where their fillings were wasted. b) Recording of inflated environmental reserves in connection with acquisitions so that the excess reserves could be used to avoid recording unrelated operating expenses. c) Improperly capitalized a series of expenses. d) Failed to stablish sufficient reserves to pay income taxes and other expenses. e) Avoided depreciation expenses on their garbage trucks by both assigning unsupported and inflated salvage values and extended their useful lives. f) Assigned arbitrary salvage values to other assets that previously had no salvage value. g) They used netting to eliminate approximately $ 490 million in a current period operating expenses and accumulated prior period accounting misstatement by offsetting then against unrelated one-time gains on the sale of exchange of assets. h) They used geographic entries to move tens of millions dollars between various line items on the company's income statement. i) Management capped Andersen's audit fees and advised Andersen that the firm could earn additional fees through special work so Andersen identified improper accounting practices and quantified the impact of those practices on the financial statements. The firm helped identified 32 must do steps to cover the fraud up. j) Waste Management secretly entered into an agreement with Andersen fraudulently to write off accumulated fraudulent errors over periods of ten years after the management did not agree with the eliminations of all this practices. k) Management profited from their fraud receiving performance-bases bonus keeping theirs high paid jobs, enhanced retirement benefits. www.aicpa.org/.../Resources/DownloadableDocuments/wastemanage.ppt Participants in the fraud: Dean L Buntrock Founder, Chairman of The Board of directors and Chief executive Phillip B Ronney President and chief operating officer, director. James E Koening executive vice president and chief financial officer Thomas C Hau Vice President corporate controller and chief accounting officer Hebert Getz Senior Vice-president general counsel and secretary Bruce D Tobecksen Vice-president of finance. How Sox could have prevent the Waste Management Specifics sections Title II Section 201 Services outside the scope of practice of auditors: Under this role the auditors are prohibit to realize any kind of accounting job different to the audit so the special work to determine the amounts on how the improper practices impact the financial statements which Andersen receive money for would be impossible to accept under this provision. Title II Section 206 Auditors Conflict of Interest. A) Resulting from Hiring Former Employee of Company's Auditor: The people that intervene in the fraud were former Waste Management auditors now its employees; they have the knowledge about the audit process and the internal company's management to complot a fraud without being discovered. The conflict of interest changes the ability to make the right decisions in this kind of situations. B) Long term relationship with Andersen: In the last part of the claim SEC stated that the relationship Water Management and Andersen had was too cozy. Title III Section 302 Corporate Responsibility for financial reports: The Sox provision states only financial records which are accurate are going to be distributed to the public. It is required that CEO and CFO \"certified the accuracy of the financial reports filed with SEC, and verified the efficacy of the company's internal controls and report any changes\". The management report has to be signed by the institution's chief executive officer and chief accounting or chief financial officer where they assume the responsibility of: Preparing the institution's annual financial statements, which in this case the management along with the auditors violated the accuracy of financial statement manipulating accounting practices to obtain fictitious gains I do not believe they would have signed the statement reporting that everything is accurate and that there are not any untrue statements, if that was the case the outcome would had been different. Title III Section 303 Improper influence on conduct of audits: The provision states \"it shall be unlawful, for any officer or director of an issuer, or any other person acting under the direction thereof, to take any action to fraudulently influence, coerce, manipulate, or mislead any independent public or certified accountant engaged in the performance of an audit of the financial statements of that issuer for the purpose of rendering such financial statements materially misleading.\" Reading about the case, I learned that the auditor proposed many times the adjustments necessaries to correct the deviations from the accounting principles but the management denied to record this proposal adjustment instead they offer Andersen in a document that they were going to write off the deviations in a period of 10 years, and Andersen was going to have a \"special job\" where they are going to identify the effect of improper accounting practices in the financial statements. This is an unethical and improper conduct for both parts but in this section is for the management only. Title III Section 304 Forfeiture of certain bonuses: the provision states: \"If an issuer is required to prepare an accounting restatement due to the material noncompliance of the issuer, as a result of misconduct, with any financial reporting requirement under the securities laws, the chief executive officer and chief financial officer of the issuer shall reimburse the issuer\". All the management was benefited from the fraud, they paid bonuses for performance, keeping the high paid jobs. If there was a condition stating that they would had to give the money back if there were discovered in the fraud then they would had thought about it twice and the events would be different. Title IV Section 406 Code of ethics for senior financial officers: under this provision the company is obligated to have ethic code for its senior financial officers which means for example honest and ethical conduct, ethical handling behavior in conflict the interest between personal and professional relationship. As I have stated before the perpetrated fraud by the management was prolonged and massive. This fact, in addition to all the subsequent events they did to cover up the fraud shows us that the company did not have any kind of ethical behavior, violating this section. If this provision would had been in place at the time then the auditors would have asked for the company's ethics code. In conclusion, the management did not behaved in an ethical manner as we can see in their actions on all of the provisions that were violated. 2) Enron Scandal early 2000's Enron was formed in 1985 when Intercom acquired Houston Natural Gas, and the primary activities the next years were internet bandwidth, risk management, and weather derivatives which is a type of weather insurance for a seasonal business. They experimented a large growth through their own interest and then an investigation was made about their complex network of off-shore partnerships and accounting practices. The fraud was discover when Sherron Watkins (Enron WP) wrote an anonymous letter to Ken Lay suggesting that Skilling had left because of accounting improprieties such as Enron's accounting method and The Raptor Transactions. Watkins explained to Ken lay that Fastow and other employees had made their money and leave only at risk of the support of the raptors. Everything fell apart when Enron's stock fell below one point and the losses of the raptors began to appear in Enron financial statements showing losses; as a consequence the SEC began an investigation on Enron and its operations. How the fraud was perpetrated: a) The President of Enron's trading operations asked permission from federal regulators to allow Enron to use an accounting practice called market-market exclusively used by brokerage and trading companies which consists in recording the security by the market price on a daily basis to calculate profit and losses. With this method Enron took in account projected earnings form long term energy projects as a current income without considering that this income was going to be collected for many years. In other words the revenue was inflated by manipulating projected futures revenue. b) Jeff Skilling told Robert Hermann (the company's general tax counsel at that time) that this market-market method allowed Enron to make money and grow without bringing taxable liabilities to the company. c) Enron recorded entries off balance sheet entities ( Special proposes entities SPE ) to move debt off form the balance sheet, therefore helping Enron keep a high credit rate which is very important in business, and hide assets and business ventures that were going or had gone under. If for example the energy plant resulted in a loss instead of a gain this would be recorded off the books and in this way it would not impact the financial statements. Enron created a counterpart for this off the balance entries called the Raptors covering their losses if the stock in their start up business fell and in which Enron transfer its own stocks at a discount price so they had the ability to pay this transferred debt while the Enron stock had a good value. d) Anderson signed the accounting practices related with Enron's partnership to keep the debt off out the balance. e) Anderson was criticized because the firm did not ask too much about the amount of money that they received in audit fees plus non audit services such as consultant fees. f) Anderson gave up the outsourcing service of internal audit because some of the Anderson's employees were hired by Enron among them Richard Causey Enron's chief accountant officer and Jeffreu MacMahon Enron's Chief Financial Officer. The line between independent auditor and Client was lost. g) In October 2001 Arthur Anderson destroy some of the working paperwork from its client Enron. Participants in the fraud: Kenneth Lay founder and Chairman Jeffrey K Skilling Chief Executive Andrew S Fastow Chief Financial Officer Ben F Glisan Vice President Mark E Koening Director of investor relations Lou Lung Pai headed of large division Nancy Temple Lawyer How Sox could have prevented Enron's fraud: Title II Section 201 Services outside the scope of practice of auditors: Under this role the auditors are prohibit to realize any kind of accounting job different to the audit. In this case the independent auditors performed activities as outsourcing of internal audit and consulting and legal advice. These roles are key in helping a company control itself about wrong doing practices and in hand of the external auditors who were managing the fraud with the executives this become a way to continue hiding was what happening. As a consequence Enron could not hire Andersen to do any other different activity as an external Audit. Title II Section 203 Audit partner rotation: This section consists in avoiding any conflict of interest to ensure the auditors provide unbiased assessments. This section requires that \"lead or concurring partners to rotate off of an audit engagement after five years and to be subject to a five year time-out period before working again on the audit engagement and other audit partners are subject to a seven-year rotation period with a two-year time out\". In this case this provision is very important because employees for Andersen and Enron were indistinguishable; they were in the same building, they did the same activities together such as picnics, dinner; as mentioned by an Enron inside source: \"you do not know who works for who\". A long time working with a client creates a special trust relationship with them where the client feels they can ask for wrongdoing actions and the auditor is stuck in a position where they have to do it and even so more with all the money that Andersen was receiving. My conclusion is that rotation of personnel benefits the independence of the auditors. Title II Section 206 Auditors Conflict of Interest. A) Resulting from Hiring Former Employee of Company's Auditor: The people that intervene in the fraud were former Enron auditors, now its employees; they have the knowledge about the audit process and the internal company's management to complot a fraud without being discovered. The conflict of interest changes the ability to make the right decisions in these kind of situations. B) Long term relationship with Andersen: They were its auditors for a long time, they have an office in the company, they enjoy and share the same activities as any of the Enron employees, and by the time they finished working for Enron the relationship was very close. In addition some critics said that the amount of money for audits and no audit fees that Anderson received by Enron made Anderson be accommodating for Enron necessities. My thinking is that this provision establishes limitations for the auditor / client relationship making it easier to manage it in an adequate way avoiding gray areas were fraud like this one can happen. Title III Section 302 Corporate Responsibility for financial reports: The Sox provision states only financial records which are accurate are going to be distributed to the public. It is required that CEO and CFO \"certified the accuracy of the financial reports filed with SEC, and verified the efficacy of the company's internal controls and report any changes\". The management report has to be signed by the institution's chief executive officer and chief accounting or chief financial officer where they assume the responsibility of: Preparing the institution's annual financial statements, which in this case the management along with the auditors violated the accuracy of financial statement manipulating accounting practices to obtain fictitious gains. This provision makes the management accountable for their actions. Before SOX existed the management would say \"I do not know about this, this is an accounting issue, it is the accountant's fault\". 1. Title IV Section 406 Code of ethics for senior financial officers: under this provision the company is obligated to have an ethic code for its senior financial officers which means for example honest and ethical conduct, ethical handling behavior managing the conflict of interest between personal and professional relationships. As I have stated before, the perpetrated fraud by management was prolonged and massive. This fact, in addition to all the subsequent events they did to cover up the fraud shows us that the company did not have any kind of ethical behavior, violating this section. In conclusion, the management did not behaved in an ethical manner as we can see in their actions on all of the provisions that were violated. The Enron case is very special because the unethical behavior form all participants was very unusual as a consequence the US Congress created the SOX provision to protect stockholder vendor, clients, and employees from unscrupulous management that only cares about money without thinking in all people that they are going to get hurt in the process