Rite Fraud When Grass Was CEO Term Paper

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Rite Aid Fraud

Over the years, there have been numerous cases of financial fraud perpetuated within the organizational mainstream of major companies. Financial fraud is often a well-coordinated sort of white-collar crime that often -- but not always - requires complicity and collusion amongst financial accountants, top management and auditors. Rite Aid came to the limelight after the U.S. Securities and Exchange Commission announced that it would be filing accounting fraud charges against the company in 2002

Meanwhile, the United States Attorney for the Middle District of Pennsylvania leveled similar criminal charges accusing former CFO Frank Bergonzi, former CEO Martin Grass and former Vice Chairman Franklin Brown of perpetuating an immense accounting fraud scheme

. Compounding the crisis, according to former Rite Aid COO, Timothy Noonan, were years of legal coaching amongst staff and mid-level employees. As investigations ensued, evidence of fraudulent manipulation of accounts, corporate malfeasance, and financial overstatement emerged. What was the role of auditors in the fraud? Since the series of corporate insolvencies including Lehman, AIG, and GM, the Big 4 audit firms - Deloitte Touche, PricewaterhouseCoopers (PwC), KPMG, and Ernst & Young -- came to the limelight with allegations of aiding and abetting accounting fraud in the corporate world

. Experts claim -- and with good reason - that a competent auditor would not miss any instance of accounting fraud since they have sufficient training to detect any such gimmick. As for the Rite Aid case, there was no sufficient or conclusive evidence to indicate that KPMG, the audit firm in charge of Rite's books, was involved in any way or that it offered any such advice.

Rite Aid

As a leading drugstore chain in America, Rite Aid is a Fortune 500 company based in Pennsylvania. Listed in the New York Stock Exchange under the ticker RAD, Rite Aid's estimated market capitalization was $1.4 billion as at February 2012

. The Fortune 500 Company is one of the key players in the U.S. pharmaceutical industry along with Walgreens and CVS. Sources indicate that the late Alex Grass was the founder of the mom-and-pop health and beauty aids store. Rite Aid has been on the spotlight several times amid emerging allegations of accounting fraud, corporate malfeasance and gross abuse of ethics and corporate integrity. The U.S. Securities and Exchange Commission announced that it would be filing accounting fraud charges against Rite Aid Corp in 2002.

Meanwhile, the United States Attorney for the Middle District of Pennsylvania leveled similar criminal charges accusing former CFO Frank Bergonzi, former CEO Martin Grass and former Vice Chairman Franklin Brown of perpetuating an immense accounting fraud scheme. With the help of accounting personnel and auditors, Rite Aid top officials allegedly overstated company income through corporate malfeasance in a way that the company appeared stable and progressive. The instances of irregularities took place between the May 1997 and May 1999 financial years. As the scandal blew wide open, Rite Aid Corp was compelled to restate its net income by over $1.6 billion and its pre-tax profit by an estimated $2.3 billion.

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Sources retrieved from the Wall Street Journal indicate that this restatement was the largest ever recorded

Pursuant to Section 21 C. Of the Securities and Exchange Act of 1934, the Commission served Rite Aid with a cease-and-desist order barring the company from committing any violation of Sections 13(a) and 13(b) (2) of the Exchange Act or causing any such future violation of Rules 12 b-20, 13 a-1 and 13 a-13 therein

. The investigation into Rite Aid financial fraud claims came in light of the issuance of suspicious severance letters offering employees millions of dollars in bid to silence those who were privy of the accounting gimmicks. There were also signs of impending fallout between Rite Aid Corp and its auditors at KPMG after they uncovered inconsistencies in financial transactions in form of material numerical overstatement to the tunes of billions of dollars. Likewise, Rite Aid had withheld reprehensible vendor deductions by failing to disclose "up charges."

The SEC expose further indicated that Rite Aid fell short of accruing expenses for Stock Appreciation Rights (SARs) while reversing previously recorded expenses to overstate income. In bid to reduce COGS and A/P, accountants made up 'gross profit entries.'

The Commission also found Rite Aid guilty of creating vendor rebates in a manner specially designed to conceal its gross profit entries. The company also overcharged vendors after failing to disclose markdowns at the retail levels. Amnesty International informants revealed that the company had also been capitalizing expenses to establish new sites for their chain stores in the United States; Rite Aid failed to write-off the capitalized expenses after the company had a "dead deal" and withdrew the bid to establish a new store and instead ordered their accountants to continue capitalizing the expenses. The SEC expose further stated that the company was equally guilty of reversing "will-call payables" as revenue. These will-call payables were payables to insurance companies for prescription orders never collected by customers

Along with the co-accused, Martin Grass was arraigned in court to answer to the charges that he sought to enrich himself by making money-losing decisions through non-disclosure of several related-party transactions. The Securities and Exchange Commission further alleged that Grass ordered officials to fabricate Finance Committee minutes relating to a corporate loan transaction meeting; upon investigation, such meeting had occurred, as it turned out. The SEC sought to impose sanctions on Rite Aid's annual bonuses while imposing civil penalties against the defendants: Brown, Bergonzi and Grass. It also sought an order barring the defendants from serving as directors or officers of a public company by permanently enjoining the three of them from violating security laws. The charges leveled against Rite Aid top officials in reference to the fraud case revealed a very disturbing picture of duplicity, corruption and ethical lapse in the highest levels of a publicly listed company. The officials in question employed an extensive range of unscrupulous techniques including accounting gimmicks specially designed to doctor the company's reported earnings. This was a case of financial.....

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