Business Research Ethics – The Phar-Mor Scandal
Adhering to a high level of ethical conduct is essential when performing business research. If a company strays from it ethical responsibilities, there is the possibility that criminal penalties will be handed down to the executive leadership. The Phar-Mor scandal, which occurred in the early 1990’s, is a prime example of how unethical research methods can lead the demise of a company and its leadership. By attempting the skew research data and embezzle company funds, CEO Michael Monus and CFO Patrick Finn were eventually tried on multiple federal charges.
About this Essay
- Student: Ron P.
- Textbook: Business Research
- Course: RES/351
- About: Find an article using the University Library or in the Electronic Reserve Readings that discusses unethical business research conduct that has resulted in individuals or a firm being convicted, or at least tried for, this conduct. Some examples include the following.
- What unethical research behavior was involved?
- Who were the injured parties?
- How has the unethical behavior affected the organization, the individual, and society?
- How could the unethical behavior be avoided or resolved?
The primary method of deceptive business research at Phar-Mor was conducted by releasing inaccurate growth figures to lenders and shareholders. This enabled the company to secure additional funding and much of it was embezzled to finance personal purchases. The skewed research results would present an overly optimistic prospect of growth, which would deceive banks and investors into providing additional capital. In reality, the capital being provided was not being used to fund future growth, but rather it was being used to pay off past due expenses and fund personal bonuses (Cottrell 1997). Furthermore, the executives had provided bribes to auditors to overlook much of this criminal activity.
The injured parties that resulted from this conduct are vast and include shareholders, employees, creditors, and customers. After the company filed bankruptcy in 1992, the majority of shareholders lost their entire investment. In total, the estimated losses to investors are estimated to be in excess of $1 billion. Likewise, creditors who had provided financing were unable to recoup the money owed and had to settle for pennies on the dollar in bankruptcy court. In addition, 5,000 employees were left without out a job after the company announced its plans to file bankruptcy. Many customers who relied on Phar-Mor for medicine were forced to find a new supplier because most of its locations were quickly closed down.
The end result of the unethical research behavior was a gradual downfall of the company. The Phar-Mor brand was tarnished beyond repair and it was unable to continue its success after emerging from bankruptcy. The media coverage of the scandal also caused many of the existing customers to lose trust in the brand. As a discount pharmacy, Pharm-Mor relied on high volume sales and customer loyalty to remain profitable. By 2002, the company was completely defunct and all stores were closed permanently. Although the scandal did not put an immediate end to the business, it created an environment that made success extremely difficult to achieve. The public lost trust in the leadership of the company and many former customers started shopping at alternative retailers such as Wal-Mart and Target.
Executives Michael Monus and Patrick Finn were brought to justice for their unethical behavior. Over 100 counts of federal crimes were filed between the executives. Prosecutors were able to seek justice for a wide range of white-collar crimes including their intentional manipulation of research data. In the end, they were both sentenced to federal prison. Patrick Finn, the CFO, was eventually sentenced to just under 3 years in prison. His sentence was reduced because he agreed to provide his testimony against his former boss. Michael Monus, the CEO, was eventually sentenced to 9 years in prison for his crimes (Cottrell 1997). In addition, the auditors who had intentionally overlooked the falsely reported information were forced to face civil charges. The high profile nature of the scandal also ensured that these men would have a difficult time working in corporate environment in the future.
The Phar-Mor scandal shows how unethical research methods can create a widespread impact on a well-established company. It can only take a couple executives to skew business research data that can enable the theft of hundreds of millions of dollars. Not only did investors lose millions of dollars, but employees and customers felt the negative effects as well. In the end, there were virtually no beneficiaries of the crimes in which these executives had engaged. Thankfully, justice was served to those determined to be responsible for the crimes. However, it was impossible to replace the losses that were experienced by many investors and creditors, or to replace the jobs that had been lost by loyal employees. In summary, this Phar-Mor scandal shows how important it is to place safeguards on research data to ensure that unethical individuals cannot use it to their own benefit.
Cottrell, David M.; Glover, Steven M. (1997). Finding Auditors Liable for Fraud. CPAJournal;Jul97, Vol. 67 Issue 7, p14