Phar-Mor and Inventory Overstatements. In the early 1990s, Phar-Mor management inflated the company's reported earnings for several years.

Generating phony profits over an entire decade was no easy feat. Phar-Mor’s CFO said the company was losing serious money because it was selling goods for less than it had paid for them. But Monus argued that through Phar-Mor’s power buying it would get so large that it could sell its way out of trouble. Eventually, the CFO caved in—under extreme pressure from Monus—and for the next several years, he and some of his staff kept two sets of books—the ones they showed the auditors and the ones that reflected the awful truth.

They dumped the losses into the “bucket account” and then reallocated the sums to one of the company’s hundreds of stores in the form of increases in inventory costs. They issued fake invoices for merchandise purchases, made phony journal entries to increase inventory and decrease cost of sales, recognized inventory purchases but failed to accrue a liability and over-counted and double-counted merchandise. The finance department was able to conceal the inventory shortages because the auditors observed inventory in only four stores out of 300, and they informed Phar-Mor, months in advance, which stores they would visit. Phar-Mor executives fully stocked the four selected stores but allocated the phony inventory increases to the other 296 stores.