Charges:
1. “The auditors should have detected the
inventory fraud. This is basic accounting. This
is Auditing 101.” (Paul A. Manion, Phar-Mor’s
lawyer)
According to my view it is correct that, external
auditors does only random checks, it is the responsibility
of management and internal auditors to count and
verify the inventories. Plus there was also mentioned
in the article that, an external inventory counting
company was hire to take the inventory and if
the CEO has no objection to the figure the external
auditor have no question to go against the CEO
decision.
2. “The auditors looked no farther than
the cover sheets on detailed inventory records.
Had they investigated a little more, they would
have found adjustments to inventory made without
explanation. They (Coopers) virtually missed the
entire company. Some of the things that they failed
to do arte of the most fundamental nature.”
(Paul Manion)
Again I would say firstly its management responsibility
to do the inventory checks, external auditors
only does the random checks. Plus, although C&L
could have done the drill down inventory checks
but if the management is on the wrong track there
are possibilities that management could shift
the inventory from store to store to increase
the stocks, so there is no reason to over-ride
the management counting and redo the inventory
unless any surprising is found.
3. Phar-Mor accused Coopers of malpractice and
negligence by failing to uncover massive fraud
and for misrepresenting Phar-Mor’s finances
in audit opinions and reports. Phar-Mor said it
based major decisions on Coopers’ reports,
such as expanding, the size and number of its
stores form 81 to 300 and obtaining a $600 million
line of credit and $155 million in long-term financing.
(Pittsburgh Post-Gazette, 2 February 1993)
Now, the auditor report is not just based on
inventory, it also accommodate sales, costing,
profits and other account heads. Based on the
eagle view picture, auditor makes their recommendation.
And, I agree that the inventory is an important
aspect but again there were misrepresentation
by the management and auditor cant catch illicit
practice done by mastermind.
4. “(David) Shapira trusted Monus more
than he should have – but he had no reason
not to trust him. David’s not a flamboyant
type of guy, but I thing Shapira tolerated him
(Monus) over the years because of what Michey
had seemingly accomplished.) (Attorney for Shapira)
Being the main partner, it is Shapira obligation
to trust or not to trust his partner. He can’t
spoil his wrong doing on others. If a person is
mastermind culprit then, it is very difficult
to identify the wrong happening in an organization
easily.
Responses:
1. “The company hired an auditor. If it
wanted a private investigator, it should have
hired on of those instead.” (Coopers &
Lybrand)
I agree but C&L should have gone a bit further
to at least put 2 lines in their audit report
that, they saw some fishy thing in the inventory,
this would have saved their head.
2. “The fraud was not simply a matter of
overlooking a few hundred million dollars worth
of soap and toothpaste. Rather, Phar-Mor’s
finance department tinkered with complex accounting
formulas, adjusting carrying values and gross
margins – schemes that aren’t easily
detected. Also, the fraud was collusive. Not one
or two low-level employees hoodwinked coopers,
but by the company’s president and its top
finance executives. Had we any inkling that senior
management was doing something fraudulent, we
would have immediately expanded our audit procedures
and dug deeper.” (David McClean, Coopers’
associate general counsel)
Again, this is a wrong state; Pham has got very
expensive medicine and health care product I believe.
And inventory of any retail outlet are major part
to represent the company strength and credibility,
and blaming the top management which may not be
culprit is wrong and they should have prove some
aspect of gray area that could be exposed further
by FBI or CBR
3. Coopers called the lawsuit a “shameless
attempt to shift the burden of its own corporate
wrongdoing form itself and its management to an
accounting firm which was a victim of corporate
fraud…Phar-Mor has functioned as an engine
of fraud for the benefit of its senior management.”
(Pittsburgh Post Gazette, 2 February 1993)
I am with Coopers but it is not right to blame
any company or head of organization. Instead should
learn a lesson and be ethical in future as down
turn of such companies bring losses to poor people
stocks earning. Plus such statement may shake
C&L trust by other corporate's.
4. “(David) Shapira should have known there
was something amiss. He was a very sophisticated
retailer. He was the famous hand on executive…How
can he accuse (the auditors) of being negligent
when he was CEO (of Giant Eagle) He’s the
guy on whose desk the buck stops.” (David
McLean)
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