The Case of Phar-Mor Inc
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The Case of Phar-Mor Inc Read “The Case of Phar-Mor Inc. In 3 pages (12-pt type, double-spaced) summarize the case and answer the following questions:
1. Could SOX have prevented the Phar-Mor fraud? How? Which specific sections of SOX?
2. Research the Waste Management scandal from the late 1990’s. Describe the scandal. Could SOX have prevented this scandal?
3. Research the Enron scandal from the early 2000’s. Describe the scandal. Could SOX have prevented this scandal?
Financial Scandals
It is important to note that the Phar-Mor is one of the pre-Enron cases that took place before the passage of the Sarbanes – Oxley Act, commonly denoted as SOX. The idea that the act could have avoided the fraud that took place ay Phar-Mor is one that is at best, debatable. A look at the ways through which Phar-Mor used to cover up its fraud is extensive, such as the creation of bucket accounts, and even by accounting standards, unearthing such methods would take years.
However, if there is the input of a whistleblower, such a situation could be averted, but with the company policies, and the cooperation of most of the senior figures of Phar-Mor in the scam, the idea of a whistleblower is one that looks like a long shot, too far to be attained. What does it mean then? Would the SOX been an exercise in futility if it had come before the Phar-Mor scandal? However, some sections of the SOX could have helped arrest and detect the fraud earlier than it took for the company, and perhaps save the investors who lost money some of their proceeds.
The Section 203 which deals explicitly with conflict of interest among the auditors. The section directs that any auditors who have worked with an issuer over a one year period before the audit should not be the same person who carries out the same scrutiny the next year. It, therefore, means that there is auditor rotation, and the big question is whether the new auditors would have used the same methods, which means that they would not have uncovered the rot. However, one can only speculate that the rotation of auditors would have been one of the ways through which SOX would have given Phar-Mor a realistic chance to detect the rot. The other section which closely correlated to this is section 206 which argues that any an auditor who had previously worked with the auditing firm cannot have Phar-Mor as a client. The inclination is that in the case of Phar-Mor, three of its auditors worked at Coopers and Lybrand auditors, and this would be a ground under SOX upon which they would have been dismissed. The idea is that all the people who could have a way of manipulating the financial statements are not allowed to have a say in the running affairs of audit services. Some of the auditors would not have been hired without being in contravention of the legal provisions of SOX.
Section 302 which gives the ethical responsibility of financial statements to the executive teams, especially the top team. It means that with the section requiring the chief executive officer and principal financial officer to authenticate the financial reports, which would have all but blamed them. Therefore, with such a legal requirement, the top management would be aware of the legal repercussions that follow them when they abdicate their duties, with the SOX guidelines laying the blame on their shoulders (Williams, 2011). The same goes for section 404 which requires an evaluation of how the management has put in place an internal control structure for the running of any company. It is an area that perhaps, with the right entries, would have uncovered the truth. Section 406 which provides a code of ethics for senior management, which would have possibly pricked the conscious of the senior management, or offered a parameter for the integration of their actions to reflect such ethical considerations.
The Waste Management Inc. scandal is one that arises from the simple premise of trying to meet “predetermined earnings targets by expanding profits and pushing down or foregoing expenses” (Ball, 2009). The revenue being generated would not translate to the set targets, and this made the managers to have a way of manipulating the financial statements. The company would increase the deflating salvage values for assets that were depreciating. Any expenses from the declining landfills would also be overlooked in the financial statements, and the company would also ignore the expenses for any landfills that were discarded. In the end, the company showed there were fewer expenses in the financial statements, which would indicate an increase in profits which was inaccurate. Well, when it comes to SOX and this scandal, it would have illegalized the false entries in the financial statements, and perhaps, the senior management would have avoided acting in perjury when giving the false entries for the financial statements.
The Enron scandal can be summed up from its use of market-to-market accounting which is a method in which “you measure the value of a security based on its current market value, instead of its book value. This can work well when trading securities, but it can be disastrous for actual businesses” (Ailon, 20110. Enron would build an asset, such as an energy plant and incorporate the projected profits in the financial statement. If the profit margin would not be realized, the loss would not be reported but would be taken to an off-the-book corporation, and this allowed Enron to overlook its unprofitable activities without showing these losses in the bottom line. In most instances, it is the legal guidelines established by SOX such as conflicts of interests, having a rotating audit firm and adherence to ethical entries in financial entries that would have helped deal with the Enron scandal, but the buck stops with top management.
References
Ailon, G. (2011). Mapping the cultural grammar of reflexivity: The case of the Enron scandal. Economy and Society, 40(1), 141-166.
Ball, R. (2009). Market and political/regulatory perspectives on the recent accounting scandals. Journal of accounting research, 47(2), 277-323.
Williams, S. L. (2011). The Case of Phar-Mor Inc. The CPA Journal, 81(9), 5 https://charteredessay.com/mrkt-5000-oc-s1-discussions-week-3-concept-discussion/
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