Final Phar-Mor Answers

Management Control Systems

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Case 4.6: Phar-Mor Inc. Lukas Bomar, Emily Dwornicki, John Hundtoft, Wei Jing, Stephanie Wawers 1) Some of the members of Phar-Mor’s financial management team were (a) Why would a company want to hire a member of its external audit team? A company may want to hire a member of their external auditing team for many reasons: They have experience with how the firm operates, They understand the financial statements, They have been working with other firms and may bring insight into how they operate, They can cut costs on training, They already have connections inside the firm, and They have personal connections with the auditing firm. If a company was to hire someone that has never had experience with the company, they would need to pay for training in the firm’s operations and hope that the new employee fits in with the rest of the staff. While the company is putting away lots of many into getting the employee ready to work, the external audit member will have a shorter learning curve to overcome and will be faster to begin their job duties. (b) If the client has hired former auditors, would this affect the independence of the existing external auditors? Hiring members of a former audit committee does have some slight independence issues. Independence is broken up into two categories usually:
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independence in fact and independence in appearance. If there are no financial, familial, or other obligations actually going on, independence in fact will be easy to prove. At the same time, though, these former auditors may still be good friends with the current external auditing team, especially if they are the same people they worked with in previous years. If there is a problem with the audit taking place, the external team may place more faith in their friend and former colleague about discrepancies than the tests they should be performing. In this matter, independence in appearance, and possibly independence in fact, can be greatly compromised. Before the introduction of Sarbanes-Oxley, external auditors may have been more likely to work to please their clients with favorable opinions. If external auditors were seeing former auditors being hired by the client, they may see this as an opportunity to possibly change jobs if they wanted out of their current position. This may cause them to look the other way at material misstatements or help cover up scandals if it means keeping the client happy. With Sarbanes-Oxley, though, this will cause more troubles for the firm as their potential return client may suffer financially from lawsuits that they go bankrupt, the audit firm could receive backlash lawsuits for not performing their duties, and the auditor could face looking for a new job with the stigma of a bad reputation following him around. (c) How did the Sarbanes-Oxley Act of 2002 and related rulings by the
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Final Phar-Mor Answers - Case 4.6: Phar-Mor Inc. Lukas...

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