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"Phar-Mor power buying gives

you Phar-Mor buying power"

"Phar-Mor for less”

"Power buying saves: Save at
Phar-Mor”
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PHAR-MOR
SCANDAL
ABOC | IGLESIA | ORIO | ZACARIAS
FLOW OF THE REPORT
1) BACKGROUND/NATURE
2) FRAUD AND MOTIVATION
3) HOW CAUGHT AND WHAT
HAPPENED?
4) IMPACT IN THE PROFESSION

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 1.
BACKGROUND/NATURE

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Phar-Mor (stylized as PHA℞-MOR) was a United
States chain of discount drug stores, based
in Youngstown, Ohio, and founded by Michael
"Mickey" Monus and David Shapira in 1982.
Some of its stores used the
names Pharmhouse and Rx Place (purchased in
the mid-1990s from the F.W. Woolworth
Company). Low prices were advertised to bring
in a large volume of sales with the slogans
"Phar-Mor power buying gives you Phar-Mor
buying power" and "Phar-Mor For Less."
Another common slogan in their TV
commercials was "Power buying saves: Save at
Phar-Mor."

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Former Type: Pharmacy
Industry: Retail
Fate: Bankruptcy, Liquidation
Founded: 1982
Defunct: 2002
Headquarters: Youngstown, Ohio, United States
Key People: Michael I. Monus, David Shapira
Products: Pharmacy, Liquor, Cosmetics, Health and Beauty Aids,
General Merchandise, Snacks, etc.
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Phar-Mor came into existence as an affiliate of
Pittsburgh-based Giant Eagle, Inc., a $1 billion,
family-owned grocery chain with 50 locations. In
1981 Giant Eagle acquired Tamarkin Co., a
privately owned grocery chain and distribution
firm (later renamed Tamco Distributors Co.).
Within a year, Giant Eagle heir David S. Shapira
and former Tamarkin vice-president Michael J.
"Mickey" Monus established Phar-Mor, Inc., an
entry into the fast-growing deep discount drug
segment.

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Phar-Mor Inc. is one of the top ten deep discount drug store chains in the
United States. The company rose to national prominence when, just seven
years after it was founded, it catapulted to leadership of the deep
discount drug retail segment. At its most prosperous, the chain boasted
more than 300 locations in 34 states. In 1992, however, one of the largest
corporate frauds in American history was perpetrated against Phar-Mor.
As a result, the chain declared bankruptcy, cut its store locations by more
than half, and was only beginning to show signs of emerging from the
crisis in early 1995.

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 2.
FRAUD AND MOTIVATION

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Mickey Monus wanted the company to
grow quickly, so he lowered the prices on
300 "price sensitive" items to amounts
that were lower than those of Wal-Mart,
and even lower than Phar-Mor's cost. The
strategy helped Phar-Mor win new
customers and open dozens of new
stores each year. However, it turned out
that many of the new customers were
coming into Phar-Mor specifically to
purchase only the price-sensitive items,
thus magnifying the company's losses.
Rather than admit to David Shapira and
Giant Eagle that Phar-Mor was suffering
losses, Mickey Monus chose to hide the
losses and make Phar-Mor appear
profitable. It was the fear of failure that
motivated the fraud.
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In order to hide Phar-Mor's cash flow problems, attract investors, and
make the company look profitable, Michael Monus and his subordinate,
Patrick Finn, altered the inventory accounts to understate costs of goods
sold and overstate income. In addition to the financial statement fraud,
internal investigations by the company estimated embezzlement in excess
of $10 million. Most of the stolen funds were used to support Michael
Monus' defunct World Basketball League. Michael Monus and Patrick Finn
used three different methods of fraud.

INCOME STATEMENTACCOUNTMANIPULATION

OVERSTATEMENT OF INVENTORY

ACCOUNTING RULES MANIPULATION

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Phar-Mor had a strong motivation toward protecting its reputation.
Another factor was that their internal accountants never provided the
auditors with requested documents or data without first carefully
reviewing them. An additional factor was that Phar-Mor used the strategy
of discount retailing to keep prices low rather then to attract consumers

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 3.
HOW CAUGHT AND WHAT
HAPPENED?

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The fraud was discovered when a travel agent noted that Phar-Mor's
checks were being used to cover World Basketball League expenses, the
travel agent then showed the check to her landlord, a Phar-Mor investor.
The investor brought the matter to CEO David Shapira, who ordered an
investigation that uncovered the fraud. While the motivations for financial
statement fraud differ, the result is always the same – misrepresented
financial results, bad decisions made on the basis of those financial
reports, and adverse consequences for the company, its principles, and
investors.

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The alleged fraud forced the deep-discount drugstore chain Monus co-
founded to seek bankruptcy court protection, the company has said.

Two other former Phar-Mor officials, chief financial officer Patrick Finn and
vice president Jeffrey Walley, also were indicted, U.S. Attorney Pat Foley
said at a news conference held shortly after the indictments were returned
by a federal grand jury.

Monus was charged with two counts of bank fraud, two counts of mail
fraud, four counts of wire fraud, two counts of filing false income tax
returns, one count of conspiracy and 118 counts of money laundering.

He is accused of falsifying Phar-Mor financial documents to inflate the

company's apparent worth and using the faked figures to fraudulently
obtain more than $1.1 billion in loans and investments.

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Monus also is accused of stealing more than $10 million from Phar-Mor
and putting it into accounts of the World Basketball League, a failed
minor-league basketball venture, and of diverting more than half a million
dollars for his personal use.

Finn, who was fired along with Monus on July 31, is accused of two counts
of bank fraud, three counts of wire fraud, five counts of money
laundering, two counts of mail fraud and two counts of filing a false tax
return.

Phar-Mor announced when it fired Monus and Finn that it had uncovered
a $350 million fraud and embezzlement scheme. The company this month
increased its estimate of losses from the alleged scheme to $499 million.
Phar-Mor filed for bankruptcy court protection about two weeks after
announcing the discovery of the alleged scheme.

The same day, the company filed suit against its former auditors, Coopers
& Lybrand, accusing the accounting firm of negligence for failing to
discover the alleged fraud. 18
Phar-Mor emerged from bankruptcy protection
in January 1995 with 143 stores remaining only
to be hit hard once again by competition from
other large retailers, such as Wal-
Mart and Target, which began opening new
stores with pharmacies.

Phar-Mor, unable to compete, was forced into

bankruptcy for the second time in September
2001, only about six and a half years after it had
emerged from its prior three-year-long
bankruptcy.

Phar-Mor became weaker during its last years

of business. Phar-Mor's second bankruptcy was
eventually to result in its total liquidation.

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 4.
IMPACT IN THE
PROFESSION

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The accounting profession maintains that it is being
unfairly assaulted by plaintiffs looking for a
convenient “deep pocket” from which to recover
losses that may result from their own poor
investment decisions.

The accounting profession is sensitive to the

potential for bias in audits. The American Institute of
Certified Public Accountants (AICPA) states in its
Code of Professional Ethics: “In the performance of
any professional service, a member shall maintain
integrity, shall be free of conflicts of interest, and
shall not knowingly misrepresent facts or
subordinate his or her judgment to others. . . .
Members should accept the obligation to act in a
way that will serve the public interest, honor the
public trust, and demonstrate commitment to
professionalism.”
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The AICPA thus acknowledges the pressures on the integrity and objectivity of
the auditor but contends that auditors can achieve a level of independence such
that users can rely on audited financial statements as unbiased assessments of
the reporting companies’ positions.

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 “
Quotations are commonly
printed as a means of inspiration
and to invoke philosophical
thoughts from the reader.

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THE END
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