McKesson & Robbins: Financial Statement Fraud 101

McKesson & Robbins: Financial Statement Fraud 101

Introduction

The purpose of this study is to expand the boundaries of our knowledge by exploring some relevant material relating to the analysis of McKesson & Robbins accounting fraud scandal. The proper application of accounting policies often requires the use of an interdisciplinary knowledge of the company, and therefore knowledge of the Commercial Companies Code, the civil procedures in civil and administrative law, tax law, and derivatives of the law, knowledge of information systems and information technology, and extensive knowledge of accounting. Proper application of the accounting policy is also often associated with the need to custom and creative interpretation of accounting rules. This flexibility will be used as an accounting policy depends to a large extent on the honesty of those responsible for keeping the accounts and the preparation of financial statements. Important implications for the proper use of the flexibility in accounting policy and thus the reliability of financial reporting - no professional ethics and morality accountants and auditors. The limit flexibility in accounting policy is, or at least should be, the point at which the true and fair view, and begins falsifying financial statements. The most famous contemporary cases of falsification of financial statements were disclosed in the United States between 2001 and 2002. Such as the case of Enron (Zack, 2009), in this paper, the author will examine the case of McKesson & Robbins and identify some important aspects related to the fraud that took place in the organization.

Discussion

The scandal of 1938 was one of the great financial scandals of the first half of the twentieth century. McKesson & Robbins Company (now McKesson Corporation) was taken in 1925 by Phillip Musica, who previously used the company Adelphia Pharmaceutical Manufacturing Company as a front for smuggling operations. Hearings conducted by the Securities and Exchange Commission, the regulatory body of the U.S. stock market in 1939, revealed that the audited financial statements of McKesson & Robbins, a registered pharmaceutical in the NYSE, containing fictitious assets worth 19 million dollars, around a quarter of total assets appearing in the balance sheet. Fictitious assets included $ 10 million in nonexistent inventory. One may ask, how was it possible that these things happen? The significant point is that in that period the rules of that time did not require any comment, or other physical count actual contact with inventories as it does today (Silverstone, 2007).

The auditor of McKesson & Robbins Company was Arthur Andersen. Arthur Andersen LLP was the only Big Eight (and later Big Five) accounting firm that was of solely American origin. Its founder, Arthur Andersen, was described as “stern, erect, somewhat ascetic, and exceedingly proper—and an unrepentant maverick.”1 He was born in 1886 and orphaned at age sixteen. To help pay for his schooling, Andersen worked as a clerk and later as an assistant controller at Fraser & Chalmers, a part of Allis-Chalmers Mfg. Co. He attended night school at Northwestern University, where he studied ...