The story of Phar-Mor shows how quickly a company that built its earnings on fraudulent transactions can dissolve like an Alka-Seltzer. One day, Stan Cherelstein, the controller of Phar-Mor, discovered cabinets stuffed with held checks totaling $10 million. Phar-Mor couldn’t release the checks to vendors because it did not have enough cash in the bank to cover the amount. Cherelstein wondered what he should do. Background Phar-Mor was a chain of discount drugstores, based in Youngstown, Ohio, and founded in 1982 by Michael Monus and David Shapira. In less than 10 years, the company grew from 15 to 310 stores and had 25,000 employees. According to Litigation Release No. 14716 issued by the SEC, Phar-Mor had cumulatively overstated income by $290 million between 1987 and 1991. In 1992, prior to disclosure of the fraud, the company overstated income by an additional $238 million. The Cast of Characters Mickey Monus personifies the hard-driving entrepreneur who is bound and determined to make it big whatever the cost. He served as the president and chief operating officer (COO) of Phar-Mor from its inception until a corporate restructuring was announced on July 28, 1992. David Shapira was the CEO of both Phar-Mor and Giant Eagle, Phar-Mor’s parent company and majority stockholder. Giant Eagle also owned Tamco, which was one of Phar-Mor’s major suppliers. Shapira left day-to-day operations of Phar-Mor to Monus until the fraud became too large and persistent to ignore. Patrick Finn was the CFO of Phar-Mor from 1988 to 1992. He brought Monus the bad news that, following a number of years of eroding profits, the company faced millions in losses in 1989. John Anderson was the accounting manager at Phar-Mor. Hired after completing a college degree in accounting at Youngstown State University, Anderson became a part of the fraud. Coopers & Lybrand, prior to its merger with Price Waterhouse, were the auditors of Phar-Mor. The firm failed to detect the fraud as it was unfolding. How It Started The facts of this case are taken from the SEC filing and a PBS Frontline episode called “How to Steal $500 Million.” The interpretation of the facts is consistent with reports, but some literary license has been taken to add intrigue to the case. Finn approached Monus with the bad news. Monus took out his pen, crossed off the losses, and then wrote in higher numbers to show a profit. Monus couldn’t bear the thought of his hot growth company that had been sizzling for five years suddenly flaming out. In the beginning, it was to be a short-term fix to buy time while the company improved efficiency, put the heat on suppliers for lower prices, and turned a profit. Finn believed in Monus’s ability to turn things around, so he went along with the fraud. Also, he thought of himself as a team player. Finn prepared the reports, and Monus changed the numbers for four months before turning the task over to Finn. These reports with the false numbers were………………………………….. 1. Evaluate the role of each of the stakeholders in this case from an ethical perspective. How do you assess blame for the Phar-Mor fraud? 2. Assume you are in Stan Cherelstein’s position. Evaluate the moral intensity issues in the case. How do these issues relate to Rest’s Four-Component Model of Ethical Decision Making? What are the challenges for Cherelstein in that regard? 3. Assume you decide to confront Monus. How would you counter the likely reasons and rationalizations you will hear from Monus? What levers do you have to influence Monus’s behavior? 4. What is the ethical message of Phar-Mor? That is, explain what you think the moral of this story is.
> How do the concepts of cognitive dissonance and organizational/ethical dissonance relate to whether an accountant might choose to blow the whistle on corporate wrongdoing?
> Just because a person has a right to blow the whistle, does that mean she has a duty to blow the whistle? How might we make that determination?
> One explanation about rights is that “there is a difference between what we have the right to do and what is the right thing to do.” Explain what you think is meant by this statement. Do you believe that if someone is rude to you, you have a right to be
> Evaluate the ethics of the practice of whistleblowing from the perspectives of virtue, rights theory, and utilitarianism.
> It has been argued that an organization that does not support those that whistle blow because of violation of professional standards is indicative of a failure of organizational ethics. Explain what you think this statement means from the perspective of
> The Committee of Sponsoring Organizations (COSO) explains the importance of the control environment to internal controls by stating that it sets the tone of an organization, influencing the control consciousness of its people. It is the foundation for al
> What is the link between the internal control environment and accountability?
> Brief and Motowidlo define prosocial behavior within the organizational setting as “behavior which is (a) performed by a member of an organization, (b) directed toward an individual, group, or organization with whom she interacts while carrying out her o
> The 2011 National Business Ethics Survey defines “active social networkers” as people who spend more than 30 percent of the workday participating on social networking sites. According to the results of the survey, active social networkers air company lin
> Five months before the new 2002 Lexus ES hit showroom floors, the company’s U.S. engineers sent a test report to Toyota City in Japan: The luxury sedan shifted gears so roughly that it was “not acceptable for production.” Days later, another Japanese exe
> The issue of the size of executive compensation packages is explored in the text. The highest paid CEO in 2014 was David Zaslav, the CEO of Discovery Communications, whose total executive compensation package was $156.1, the vast majority of which was fr
> In her book The Seven Signs of Ethical Collapse, Jennings explains: “When an organization collapses ethically, it means that those in the organization have drifted into rationalizations and legalisms, and all for the purpose of getting the results they w
> In teaching about moral development, instructors often point out the threefold nature of morality: It depends on emotional development (in the form of the ability to feel guilt or shame), social development (manifested by the recognition of the group and
> In this chapter, we have discussed the Joe Paterno matter at Penn State. Another situation where a respected individual’s reputation was tarnished by personal decisions is the resignation of David Petraeus, former U.S. military general and head of the Ce
> In the text, we point out that Rest’s model is not linear in nature. An individual who demonstrates adequacy in one component may not necessarily be adequate in another, and moral failure can occur when there is a deficiency in any one component. Give an
> In his research into the components of ethical decision making, Rest raised the following issue: Assuming someone possesses sound moral reasoning skills, “Why would they ever chose the moral alternative, especially if it involves sacrificing some persona
> Using the child abuse scandal at Penn State discussed in Chapter 1, explain the actions that would have been taken by Joe Paterno if he had been reasoning at each stage in Kohlberg’s model and why.
> One reason otherwise good people may do bad things is what psychologists call scripts. This term refers to the procedures that experience tells us to use in specific situations. Unlike other forms of experience, scripts are stored in memory in a mechanic
> In the debate over why good people do bad things, Tenbrunsel suggests that people are often blind to the ethical dimensions of a situation, a concept he refers to as “bounded ethicality.” Craig Johnson addresses moral disengagement by saying: When others
> A major theme of this chapter is that our cognitive processes influence ethical decision making. Use the theme to comment on the following statement, which various religions claim as their own and has been attributed to Lao Tzu and some say the Dalai Lam
> Explain what you think each of the following statements means in the context of moral development. a. How far are you willing to go to do the right thing? b. How much are you willing to give up to do what you believe is right? c. We may say that we would
> The nature of accountants’ work puts them in a special position of trust in relation to their clients, employers, and the general public, who rely on their professional judgment and guidance in making decisions. Explain the link between professional judg
> Windsor and Kavanagh propose in a research study that client management economic pressure is a situation of high moral intensity that sensitizes auditors’ emotions and thus motivates their moral reasoning to make deliberative decisions either to resist o
> Emotional self-awareness refers to understanding your own feelings, what causes them, and how they impact your thoughts and actions. It is widely known that ethical dilemmas involving other employees/managers are inherently emotional. Researchers have fo
> 1. Do you think it is the same to act in your own self-interest as it is to act in a selfish way? Why or why not? 2. Do you think “enlightened self-interest” is a contradiction in terms, or is it a valid basis for all actions? Evaluate whether our laisse
> Explain why the process of ethical decision making depends on a number of moral, social, psychological, and organizational factors.
> On October 15, 2009, in Fort Collins, Colorado, the parents of a six-year-old boy, Falcon Heene, claimed that he had floated away in a homemade helium balloon that was shaped to resemble a silver flying saucer. Some in the media referred to the incident
> In a June 1997 paper published in the Journal of Business Ethics, Sharon Green and James Weber reported the results of a study of moral reasoning of accounting students prior to and after taking an auditing course. The study also compared the results bet
> Identify the ethical issues in each of the following situations and what your ethical obligations are, assuming you are faced with the dilemma. a. A consultant for a CPA firm is ordered by her superior to downgrade the ratings of one company's software p
> Sharon is an intern with a local CPA firm. Prior to returning to school, her supervisor goes on sick leave and asks her to do some complicated reconciliation work for him. She is given what seems to her to be an unrealistic deadline. Sharon looks at the
> According to a survey reported by the Daily Mail in the United Kingdom, one in eight women has bought expensive clothes, worn them on a night out, and then returned them the next day. Nearly half of those who did confess said they were motivated by money
> You are in charge of the checking account for a small business. One morning, your accounting supervisor enters your office and asks you for a check for $150 for expenses that he tells you he incurred entertaining a client last night. He submits receipts
> In this chapter, we discuss the study by Libby and Thorne of the association between auditors’ virtue and professional judgment, done by asking members of the Canadian Institute of Chartered Accountants to rate the importance of a variety of virtues. The
> Michael just graduated with a degree in Accounting from State University. He worked hard in school but could only achieve a 2.95 GPA because he worked 40 hours a week to pay his own way through college. Unfortunately, Michael was unable to get a job beca
> Explain why moral problems may be of greater intensity than nonmoral problems.
> The following two statements about virtue were made by noted philosophers/writers: 1. MacIntyre, in his account of Aristotelian virtue, states that integrity is the one trait of character that encompasses all the others. How does integrity relate to, as
> Do you believe that a person’s stage of moral development and personal moral philosophy play a role in how values and actions are shaped in the workplace? Explain.
> Do you believe that our beliefs trigger our actions, or do we act and then justify our actions by changing our beliefs? Explain.
> We are citizens of the world. The tragedy of our times is that we do not know this. Woodrow T. Wilson (1856–1924), 28th president of the United States At five past midnight on December 3, 1984, 40 tons of the chemical methyl isocynate (MIC), a toxic gas,
> In 2005, Tony Menendez, a former Ernst & Young LLP auditor and Director of Technical Accounting and Research Training for Halliburton, blew the whistle on Halliburton’s accounting practices. The fight cost him nine years of his life. Just a few months la
> On September 25, 2012, Japanese camera and medical equipment maker Olympus Corporation and three of its former executives pleaded guilty to charges related to an accounting scheme and cover-up in one of Japan’s biggest corporate scandals. Olympus admitte
> Bennie Gordon graduated with a Masters in Accounting two years ago and now works as an accounting manager at the division level at Jet Energy Company, a company headquartered in Winston-Salem, North Carolina. Jet Energy is a regulated utility company by
> The facts of this case are from the Walmart shrinkage fraud discussed in an article in Nation on June 11, 2014. “Literary license” has been exercised for the purpose of emphasizing important issues related to organizational ethics at Walmart. Any resembl
> On October 15, 2009, in Fort Collins, Colorado, the parents of a six-year-old boy, Falcon Heene, claimed that he had floated away in a homemade helium balloon that was shaped to resemble a silver flying saucer. Some in the media referred to the incident
> Natalie got the call she had been waiting for over six long months. Her complaint to the human resources department of Franklin Industries had been dismissed. It was HR’s conclusion that she was not retaliated against for reporting an alleged embezzlemen
> United Thermostatic Controls is a publicly owned company that engages in the manufacturing and marketing of residential and commercial thermostats. The thermostats are used to regulate temperature in furnaces and refrigerators. United sells its product p
> Occupational fraud comes in many shapes and sizes. The fraud at Rite-Aid is one such case. On February 10, 2015, the U.S. Attorney’s Office for the Middle District of Pennsylvania announced that a former Rite Aid Vice President, Jay Findling, pleaded gui
> How could a CEO and chairperson of the board of directors of a major company resign in disgrace over a personal relationship with a contractor that led to a sexual harassment charge and involved a conflict of interests, a violation of the code of ethics?
> Reprinted with permission from “The Parable of the Sadhu,” by Bowen H. McCoy, Harvard Business Review. Copyright © Harvard Business Publishing. Last year, as the first participant in the new six-month sabbatical program that Morgan Stanley has adopted, I
> “I’m sorry, Lucy. That’s the way it is,” Ricardo said. The client wants it that way. “I just don’t know if I can go along with it, Ricardo,” Lucy replied. “I know. I agree with you. But, Juggyfroot is our biggest client, Lucy. They’ve warned us that they
> Milton Manufacturing Company produces a variety of textiles for distribution to wholesale manufacturers of clothing products. The company’s primary operations are located in Long Island City, New York, with branch factories and warehouses in several surr
> The facts of this case are fictional. Any resemblance to real persons, living or dead, is purely coincidental. Kenny is always looking to make contacts in the business world and enhance his networking experiences. He knows how important it is to drive c
> Troy just returned from a business trip for health-care administrators in Orlando. Kristen, a relatively new employee who reports to him, also attended the conference. They both work for Gateway Hospital, a for-profit hospital in the St. Louis area. The
> Assume you are interviewing for a position with an accounting firm and the recruiter asks you the following questions. Craft a response that you would feel comfortable giving for each one. • Describe an experience in the workplace when your attitudes an
> Jackson Daniels graduated from Lynchberg State College two years ago. Since graduating from college, he has worked in the accounting department of Lynchberg Manufacturing. Daniels was recently asked to prepare a sales budget for the year 2016. He conduct
> Brenda Sells sent the tax return that she prepared for the president of Purple Industries, Inc., Harry Kohn, to Vincent Dim, the manager of the tax department at her accounting firm. Dim asked Sells to come to his office at 9 a.m. on Friday, April 12, 20
> Gregory and Alex started a small business based on a secret-recipe salad dressing that got rave reviews. Gregory runs the business end and makes all final operational decisions. Alex runs the creative side of the business. Alex’s salad dressing was a jal
> The WorldCom fraud was the largest in U.S. history, surpassing even that of Enron. Beginning modestly during mid-year 1999 and continuing at an accelerated pace through May 2002, the company—under the direction of Bernie Ebbers, the CEO; Scott Sullivan,
> Barbara is working on the audit of a client with a group of five other staff-level employees. During the audit, Diane, a member of the group, points out that she identified a deficiency in the client’s inventory system that she did not discover during th
> Better Boston Beans is a coffee shop located in the Faneuil Hall Marketplace near the waterfront and Government Center in Boston. It specializes in exotic blends of coffee, including Sumatra Dark Roast Black, India Mysore “Gold Nuggets,” and Guatemala An
> Cleveland Custom Cabinets is a specialty cabinet manufacturer for high-end homes in the Cleveland Heights and Shaker Heights areas. The company manufactures cabinets built to the specifications of homeowners and employs 125 custom cabinetmakers and insta
> Shifty Industries is a small business that sells home beauty products in the San Luis Obispo, California, area. The company has experienced a cash crunch and is unable to pay its bills on a timely basis. A great deal of pressure exists to minimize cash o
> Kevin Lowe is depressed. He has been with the CPA firm Stooges LLP for only three months. Yet the partners in charge of the firm—Bo Chambers and his brother, Moe—have asked for a “sit-down.” Here’s how it goes: “Kevin, we asked to see you because your ti
> Gloria Hernandez is the controller of a public company. She just completed a meeting with her superior, John Harrison, who is the CFO of the company. Harrison tried to convince Hernandez to go along with his proposal to combine 12 expenditures for repair
> Sir Walter Scott (1771–1832), the Scottish novelist and poet, wrote: “Oh what a tangled web we weave, when first we practice to deceive.” Comment on what you think Scott meant by this phrase.
> Part A Billy Tushoes recently received an offer to join the accounting firm of Tick and Check LLP. Billy would prefer to work for Foot and Balance LLP but has not received an offer from the firm the day before he must decide whether to accept the positio
> Jose and Emily work as auditors for the state of Texas. They have been assigned to the audit of the Lone Star School District. There have been some problems with audit documentation for the travel and entertainment reimbursement claims of the manager of
> On December 3, 2012, a terrible incident occurred in the New York City subway when Ki-Suck Han was pushed off a subway platform by Naeem Davis. Han was hit and killed by the train, while observers did nothing other than snap photos on their cell phones a
> Ed Giles and Susan Regas have never been happier than during the past four months since they have been seeing each other. Giles is a 35-year-old CPA and a partner in the medium-sized accounting firm of Saduga & Mihca. Regas is a 25-year-old senior accoun
> Yes. Cheating occurs at the prestigious Harvard University. In 2012, Harvard forced dozens of students to leave in its largest cheating scandal in memory, but the institution would not address assertions that the blame rested partly with a professor and
> This case focuses on improper accounting and management decision making at Waste Management, Inc., during the period of its accounting fraud from 1992 to 1997, and the role and responsibilities of Arthur Andersen LLP (Andersen), the Waste Management audi
> Some of my management decisions turned wrong, but fraud? Never, never, never.” This statement was made by the former CEO of Vivendi Universal, Jean-Marie Messier, as he took the stand in November 20, 2009, for a civil class action lawsuit brought against
> HFS Incorporated (HFS) was principally a controller of franchise brand names in the hotel, real estate brokerage, and car rental businesses, including Avis, Ramada Inn, Days Inn, and Century 21. Comp-U-Card (CUC) was principally engaged in membership-bas
> South City Electronics is involved in printed circuit board assembly (PCBA) dealing with the assembly of complex electronic system processes. The electronics company, based in the city of South San Francisco, is publicly owned with three other locations
> The U.S. Court of Appeals for the Fourth Circuit affirmed the lower court ruling in the case Public Employees’ Retirement Association of Colorado; Generic Trading of Philadelphia, LLC v. Deloitte & Touche, LLP that Deloitte defendants lacked the necessar
> Assume that a corporate officer or other executive asks you, as the accountant for the company, to omit or leave out certain financial figures from the balance sheet that may paint the business in a bad light to the public and investors. Because the requ
> On July 24, 2009, the U.S. Court of Appeals for the District of Columbia upheld the finding of the SEC that Gregory M. Dearlove, a certified public accountant and formerly a partner with the accounting firm Deloitte & Touche LLP, engaged in improper prof
> Denise Norris is a manager at Fitch & Jones, LLP, a regional audit firm in Providence, Rhode Island. Norris is preparing for a meeting with Alan Morse, the controller of Rhody Electronics, a publicly held company in Providence. The meeting concerns a var
> On March 4, 2009, the SEC reached an agreement with Krispy Kreme Doughnuts, Inc., and issued a cease-and-desist order to settle charges that the company fraudulently inflated or otherwise misrepresented its earnings for the fourth quarter of its FY2003 a
> The artificial tax shelter arrangements developed by KPMG LLP for wealthy clients that led to the settlement of a legal action with the Department of Treasury and the Internal Revenue Service. On August 29, 2005, KPMG admitted to criminal wrongdoing and
> After the news broke about the frauds at Enron and WorldCom in the United States, there were those in Europe who used the occasion to beat the drum: “Our principles-based approach to accounting standard-setting is better than your rules-based approach.”
> It’s impossible! There is no justification for ignoring these entries.” These are the words spoken by Jackie Bauman at a meeting with the CFO of the company, Glen Donner. Cumberland Lumber is a regional company and privately owned by members of the Simon
> Research Triangle Software Innovations is a software solutions company specializing in enterprise resource planning (ERP) business management software. Located in the Research Triangle Park, North Carolina, high-tech area, Research Triangle Software Inno
> The North Face, Inc. (North Face) is an American outdoor product company specializing in outerwear, fleece, coats, shirts, footwear, and equipment such as backpacks, tents, and sleeping bags. North Face sells clothing and equipment lines catered toward w
> A member of the audit team of Ernst & Young in Canada became concerned about the accounting for inventory by its Canadian client, Sino-Forest, a Chinese company in the forestry business and headquartered in Ontario province. He sent an e-mail to the mana
> One of the earliest frauds during the late 1990s and early 2000s was at Sunbeam. The SEC alleged in its charges against Sunbeam that top management engaged in a scheme to fraudulently misrepresent Sunbeam’s operating results in connection with a purporte
> Do you think there are any circumstances when you should go outside the company to report financial wrongdoing? If so, to what person/organization would you go? Why? If not, why would you not take the information outside the company?
> It took a long time but the Securities and Exchange Commission finally acted and held auditors responsible for the fraud that occurred in banks during the financial recession. Surprisingly to some, the TierOne bank case explained below was the nation’s f
> Background For years, Dell’s seemingly magical power to squeeze efficiencies out of its supply chain and drive down costs made it a darling of the financial markets. Now we learn that the magic was at least partly the result of a huge financial illusion.
> It’s no fun accepting a position for your dream job and then red flags are raised that make you wonder about the culture of the company. Those are the thoughts of Donna Mason on January 18, 2016, as she prepares for a meeting with her accounting supervis
> Back on January 16, 2003, after more than 23 years, General Electric (GE) Co. decided to dump its well-recognized slogan, “We Bring Good Things to Life,” and decided to spend more than $100 million to launch a new campaign with the tagline, “Imagination
> We can’t recognize revenue immediately, Paul, since we agreed to buy similar software from DSS,” Sarah Young stated. “That’s ridiculous,” Paul Henley replied. “Get your head out of the sand, Sarah, before it’s too late.” Sarah Young is the controller for
> Beazer Homes is a home-building company headquartered in Atlanta, Georgia. Its stock is listed on the New York Stock Exchange. Beazer is required to file Form 10-Q and Form 10-K, as well as an 8-K form when certain changes occur, such as restating financ
> Canada-based Nortel Networks was one of the largest telecommunications equipment companies in the world prior to its filing for bankruptcy protection on January 14, 2009, in the United States, Canada, and Europe. The company had been subjected to several
> Satyam Computer Services, now Mahindra Satyam, is an India-based global business and information technology services company that specializes in consulting, systems integration, and outsourcing solutions. The company was the fourth-largest software expor
> Con-way is a Delaware corporation headquartered in San Mateo, California. It is an international freight transportation and logistics services company that conducts operations in a number of foreign jurisdictions. During the relevant period, the company
> Kirsten had her dream job, combining her love of accounting with traveling. She’d just had a big promotion to Director of International Accounting for Getaway Cruise Lines. As the director in the Houston office, she was currently overseeing final contrac
> In the discussion of loyalty in this chapter, a statement is made that “your ethical obligation is to report what you have observed to your supervisor and let her take the appropriate action.” We point out that you may want to take your concerns to other
> Kay & Lee LLP was retained as the auditor for Holligan Industries to audit the financial statements required by prospective banks as a prerequisite to extending a loan to the client. The auditor knows whichever bank lends money to the client is likely to
> On December 13, 2012, Vertical Pharmaceuticals Inc. and an affiliated company sued Deloitte & Touche LLP in New Jersey state court for alleged accountant malpractice, claiming the firm’s false accusations of fraudulent conduct scrapped a public company’s
