Britany McGarity: Accounting Supervision Framework

Sarbanes-Oxley was published in 2002 and sets the standard for upper management and auditors. It is divided into 11 titles including: the foundation of the Public Company Accounting Oversight Board, Auditor Independence, Corporate Responsibly, Enhanced Financial Disclosures, Analyst Conflicts of Interest, Commission Resources and Authority, Studies and Reports, Corporate and Criminal Fraud Accountability, White Collar Crime Penalty Enhancement, Corporate Tax Returns, and Corporate Tax Returns. All of these titles are important but the ones that focus on compliance include 302, 401, 404, 409, 802, and 906.  In this paper, I will discuss how Sarbanes-Oxley and the above titles could have been used to prevent fraud in Phar Mor, Waste Management, and Enron.

Phar Mor Inc. was a discount drugstore that was in operation during 1982. The company president was Micheal “Mickey” Monus who was also the vice president of the sister company of Phar Mor, Tamco. Phar Mor was involved in a scandal that consisted of upper management overstating inventory to cover losses incurred. Since they sold their product so low they were not actually making profit.

It was also the fault of the auditors of Phar Mor, Coopers and Lybrand, who is stated in our reading as not auditing accounts with zero balances, not checking the inventory of all stores, and not using discretion about which stores would be audited. (Williams, 2011). The top executives at Phar Mor knew this information and exploited it.

Waste Management Inc. is a waste company founded in1894 by Larry Beck. They offered environmental services to millions of customers in America, Canada, and Puerto Rico.

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They were well on the way to being the biggest waste and environmental company but after the scandal they went into bankruptcy. In the years of 1992-1997, the senior management of Waste was stated as changing financial statements by tampering with all expenses especially deprecation expenses. This was done by not recording the expenses acquired by landfills, inflating the value of vehicles owned, and extending the useful lives of said vehicles. They also moved income in between accounts which gave the illusion of profits, assets, and no liabilities since they changed it each year. The upper management of Waste Management was caught when a new CEO was elected in. The CEO ordered the review of financial statements and found that they were understated by $1.7 billion.

Former management was interested in reaching set margins for each year and protecting their jobs. The auditors, Arthur Andersen, helped management cover the scandal by giving out unqualified opinions and writing off accounting errors over time. It was also stated that the CFO, CAO, and the VPF were affiliated with Arthur Andersen by either being trained by or sitting on the at the time audit team.  One of the worse accounting scandals to date, Enron was founded in 1985 and was an energy trading company. The company went into bankruptcy after its scandal broke in 2001. The losses were massive at $74 billion. The executives were found to have pocketed a large majority of the money while reporting super inflated profits. They had control over financial statement because of government deregulation that allowed them to manipulate the statements.

This made it so they could lie about the position of the company to gain more investors and keep the current ones they were stealing money from.  The CEO Jeffery Skilling used mark to market accounting to hide the financial loss of the trading company. In all the cases, I believe Sarbanes-Oxley 302, 401, 409, 802, and 906 would have been beneficial. All the mentioned sections cover compliance while 906 discloses fines for the CEO/CFO. If management had been required to follow SOX in Phar Mor, Waste Management, and Enron, 302, 401, 404, 409, 802, and 906 they would have been in compliance at all times. If anything, we may need stronger consequences to further influence people not to commit these kind of crimes. 302 states that management is required to make sure that accuracy of all financial statements. If they are held accountable for any falsification then the idea is they would guarantee people are reporting the right numbers.

401 is the requirement to disclose any off balance sheet items. This helps deter fraud by having to show what assets, liabilities, and obligations are considered off the balance sheet and should explain why they are considered. 404 requires that management and auditors establish internal controls on reporting methods and test those internal controls. 409 is the disclosure of any changes in financial position using graphs. These are required to be easy to understand. 802 states the penalties fines, and imprisonment for the intent to change, lie, or destroy documents. Lastly, 906 describes the corporation’s responsibility for financial reports. This includes 5 million in fines and 20 years in prison. People are obstructing justice for the shareholders and playing with a lot of money. The consequences for people actions are listed and are made to be followed.

After researching Phar Mar, Waste Management Inc., and Enron, I have found that these scandals sound so similar. In some instances it feels like I was reading the same story; Upper management gets greedy, hides losses in a “bucket” line in financial statements, and bribes the auditors to assist in the cover up. A majority of upper management has worked or has some working connection to the auditor for the company and that is a main problem and it’s usually a senior member from the big accounting firms. Seems that we have placed a lot of faith in the names of those Big 3. People are always changing and while these people followed the rules at one point, they broke the law for money.


  1. A Guide Sarbanes-Oxley Compliance. (2019, January 10). Retrieved from SoxLaw:
  2. Easy Guide to Understanding ENRON Scandal Summary. (2019, January 13). Retrieved from
  3. Ellrich, N. P. (2019, January 10). The Waste Management, Inc. 1998 Fraud Scandal. Retrieved from Ensscpa:
  4. Sarbanes-Oxely 101. (2019, January 13). Retrieved from
  5. Williams, S. L. (2011). The Case of Phae-Mor Inc.: Could SOX Have Prevented the Fraud? The CPA Journal, 58-65.

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Britany McGarity: Accounting Supervision Framework. (2021, Dec 26). Retrieved from

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