7/17/2019 Phantom Inventory

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Phantom InventoryMickey Monus was the local hero in Youngstown, Ohio. He acquired a localdrugstore, and within 10 years, added 299 more stores to form the nationaldee!discount retail chain, "har!Mor, #nc. $he comany was %iewed as therising star &y some retail e'erts and was considered to &e the ne't (al!Mart. )%en *am (alton announced that the only comany he feared in the

e'ansion of (al!Mart was "har!Mor."har!Mor sold a %ariety of household roducts and rescrition drugs atsu&stantially lower rices than other discount stores. Monus descri&ed thecomany+s strategy as ower &uying,- where&y "har!Mor loaded u onroducts when suliers were selling at rock!&ottom rices and assedthose sa%ings to cost!conscious customers through deely discountedrices.ctually, "har!Mor+s rices were so low that the comany was selling goodsfor less than their cost, causing the comany to lose money. Howe%er,Monus continued to argue internally that through "har!Mor+s ower &uying,it would get so large that it could sell its way out of trou&le. /nwilling toallow these shortfalls to damage "har!Mor+s aearance of success, Monus

and his team &egan to engage in creati%e accounting so that "har!Morne%er reorted these losses in its nancial statements.Management dumed the losses into &ucket accounts,- only to reallocatethose amounts to the comany+s hundreds of stores in the form of hantom increases inin%entory costs. Monus+team issued fake in%oices for merchandise urchases, made fraudulent ournal entriesto increase in%en tory anddecrease cost of goods sold, and o%ercounted and dou&le!counted in%entory items./nfortunately, the auditors ne%er unco%ered the fraud. $hey allegedly o&ser%edin%entory in only four stores out of 00, and they informed "har!Mor management months in ad%ance a&out the stores theywould %isit. "har!More'ecuti%es fully stocked the four selected stores &ut allocated the false in%entory

increases to the other 293 stores. $he fraud was ultimately unco%ered when a tra%el agent recei%ed a "har!Mor checksigned &y Monus aying fore'enses that were unrelated to "har!Mor. $he agent showed the check to her landlord,who haened to &e a "har!Mor in%estor, and he contacted 4a%id *hairo, "har!Mor+s 5)O. *u&sequentin%estigation of the in%alid e'endituree%entually led to the disco%ery of the in%entory fraud.