Case 4.6 Pharmor

I am observing the case of Phar-Mor Inc. against Michael “Mickey” Monus and Coopers for Accounting Fraud, Litigation, and Auditor Liability. The answers below answer the questions asked after reading the case. I answered them to the best of my ability and knowledge.

Some of the members of Phar-Mor’s financial team were former auditors for Coopers and Lybrand. Why would a company want to hire a member of its external audit team? The company thought it would be best to hire a member of its external audit team, to my senses, because they would already have an opinion in knowing what the business is undergoing in fraud. They were hired because they could be a part of the fraud and Coopers was always telling their auditors to generate more business. Someone with an external outlook can be agreeing on a business investment and be a part of the fraud that is being done as long as they get a good chunk of the compensation. Being hired from an external auditor business brings in what you call assurance that the audit will always be in your favor if they have mutual agreement.

If the client has hired former auditors, would this affect the independence of the existing external auditors? Of course it would affect the independence of the existing external auditors because you have auditors who were formally apart of the business who are trying to audit themselves having the knowledge of what is going on. The external auditors always had a sense that the company was high risk and that there were understated and over stated assets, liabilities, and equity happening. With former auditors coming in, they can have their own opinion with a totally different outcome of the audit compared to the external auditors. The company could deny the showing of documents to the external auditors or they would rearrange the financial statements for the external auditors to see. They could even change the statements after the auditors approved them.

How did the Sarbanes-Oxley Act of...