Introduction
Accounting scandals are business and/or political scandals that arise with disclosure of the financial offences by the trusted executives of governments or corporations. These misdeeds normally involve complex means of overstating revenues, misdirecting or misusing funds, overstating value of the corporate assets, understating expenses or underreporting liabilities existence, sometimes with collaboration of the officials in other affiliates or corporations. This essay focuses on the financial scandal by McKesson & Robbins, Inc.
One of the key financial scandals of 20th C is McKesson & Robbins, Inc. scandal. Philip Musica took over McKesson & Robbins, Inc. Company presently known as McKesson Corporation in 1925. Musica, a two times convicted felon, essentially used assumed names in order to hide his identity in owning two companies, F. Donald Coster at McKesson & Robbins and Frank D. Costa at Adelphia Pharmaceutical. Though he succeeded in explaining the legitimate business operations of the company, he recruited his three brothers, who were also working under the adopted names, two inside the company and one outside it, to generate false sales documentation as well as pay the commissions to Shell Distribution Company that they controlled. In due course, Julian Thompson, McKesson & Robbins treasurer discovered that the distribution company was false. Eventually it was determined that approximately 20 million US dollars of 87 million US dollars assets of the balance sheet belonging to the company were phony (Markham, 171).
Philip Musica was the mastermind of the fraud. Musica was born to poor Italian refugees and was raised in poverty, but he later became a countrywide recognized leader in politics and business. His criminal career started early. By the time he was 30 years, Musica had already been convicted of fraud as mentioned above. One of the convictions was for evading import tariffs through bribing the custom officials to document false information about the incoming shipments. In the second conviction, Musica had used forged invoices to acquire large bank loans. He founded Adelphi Pharmaceutical Manufacturing Company in the year 1919 when he assumed the name Frank D. Costa to hide his criminal record. In 1925, using the adopted name of Frank D. Costa, he bought McKesson & Robbins using his bootlegging profits.
The other brother, using the adopted name Robert Dietrich, was in fact placed in charge of the shipping department of McKesson & Robbins. Dietrich would fake the shipping documents in order to offer evidence that McKesson & Robbins Inc. had delivered inventory to legitimate customers. His third brother, using the assumed name George Dietrich, was employed, as the assistant treasurer of McKesson & Robbins Company. George Dietrich would transfer cash between various bank accounts belonging to the company to make cash payments appearance for the purchases and money receipts from the customers. For every sale, the company paid W.W. Smith & Co., the fictitious agency a commission of 0.75%. These four brothers shared Smith commissions amongst themselves with Philip, the mastermind, getting largest share (Clikeman, 98).
It was in late 1938 that McKesson & Robbins swindle was discovered when Julian Thompson, the company’s treasurer became suspicious of huge payments that McKesson & Robbins Inc. was making to the W.W. Smith & Co. This treasurer acquired Dunn & Bradstreet credit reports copies, which Musica and his three brothers had used to satisfy the auditors of McKesson & Robbins Inc. the viability of W.W. Smith & Co. agency. When Thompson showed a Dunn & Bradstreet representative the credit reports, he learned that Dunn & Bradstreet had never heard an agency by the name W.W. Smith & Co. hence the credit reports were phonies.
On 6 December the same year, SEC opened an inquiry into the accounting of McKesson & Robbins Inc. and New York Stock Exchange put off trading of the shares belonging to the company. A week later, Coster was arrested by the federal agents, fingerprinted and was later released on bond. The following day, the investigators learnt from the fingerprints that the treasured entrepreneur F. Donald Coster M.D., Ph.D. was essentially convicted twice fraudster Philip Musica. The investigators ordered Coster/Musica to be taken into custody, but just like Ivar Kreuger, he took his life before being arrested (Partnoy, 57).
This fraud by McKesson & Robbins Inc. led to important changes in the procedures for conducting audits and appointing auditors. After four hearing months, in which 46 witnesses made 3,000 testimony pages, SEC suggested that the non-officer participants of client’s board appoint auditors and that these auditors to be chosen by the shareholders and address their report to these shareholders. American Institute of certified Public Accountants selected its initial standing committee on the auditing procedures. The first standard by the committee, Statements on Auditing Procedure No. 1, “Extensions of Auditing Procedure,” made the observing inventory as well as the confirming accounts receivable that is, the two procedures, that would actually have helped in detecting the fraud by McKesson & Robbins.
The two scandals by the company actually prompted reforms, which helped the profession instead of hurting it. The requirements for compulsory audits, which followed the preceding accounting scandals such as Kreuger & Toll scandal increased market for the services of accountants. The changes in the audit procedures, which came after McKesson & Robbins scandal in reality, improved the quality of audit. Reforms that are being enacted currently in response to various frauds have the potential to aid the profession of accounting.
The McKesson & Robbins fraud led to crucial corporate governance as well as auditing reforms. SEC made it mandatory for the public companies to have the audit committees of the “outside” directors and more importantly, the requirement that auditors’ appointment be approved by shareholders. In addition, the present American Institute of Certified Public Accountants, formerly called American Institute of Accountants adopted the audit standards demanding that the auditors should verify inventory as well as the accounts receivables. Sarbanes-Oxley Act’s necessity for the auditors to attest to their customer’s internal accounting controls adequacy will in fact offer additional millions of dollars as revenues to the accounting firms. Moreover, increased use of the forensic auditing measures in auditing will help to catch or discourage more frauds and as a result will help to reduce the occurrence of lawsuits against the accounting firms.
Works cited
Markham, Jerry W. A Financial History of Modern U.S. Corporate Scandals: From Enron to Reform. Armonk, N.Y: M.E. Sharpe, 2006.
Partnoy, Frank. The Match King: Ivar Kreuger, the Financial Genius Behind a Century of Wall Street Scandals. New York: Public Affairs, 2009. Print.
Paul M. Clikeman, “The Greatest Frauds of the (Last) Century,” monograph, May 2003
