McKesson & Robbins
By:
Sam Choi
Duncan Hawvermale
Matthew Heo
Abstract
• McKesson Fraud occurred during years of
1926 – 1938
• Misstatement of Assets estimated to be
around 18-38 Million Dollars
• Philip Musica is a career fraudster with two
convictions prior to McKesson
• The fraud ended up being a turning point for
US Auditing standards and the impact is felt
to this day
Frank Musica
• Born 1884 to Italian Parents
• Dropped out of Highschool at Age of 14
• Was convicted of his first fraud at Age of 25
• Convicted of his second fraud at age of 29
• Bought McKesson & Robbins for $1,000,000
in 1926
• Used Aliases such as Dr. F Donald Coster and
William Johnson to hide his criminal past
First Fraud
• Shipment Fraud involving the bribery of officials
• Made profit by cutting out the middleman by
directly importing fine Italian foodstuffs.
• Bribed port officials to pay lower tariffs to
outpace his competition
• Paid up to 500$ a shipment to officials
• Defrauded at 1909 by anti-corruption measure
• Sentenced to a year in a reformatory
Second Fraud
• US Hair importing of Hair
• Used invoices and receipts multiple times in
difference offices to make the assets and
profits look larger than it was
• Set up multiple international offices
• Got convicted and was let go with a
suspended sentence by turning in his
“friends” from the tomb
Adelphi Pharmaceutical
• Founded Adelphi Pharmaceutical
• Manufactured and sold Hair tonics and
Cosmetics involving denatured alcohol
• Sold to bootleggers due to ease of distillation
from the products
• Bootleggers turned the products into whiskey
Girard & Co: The Beginning
Piece
• In 1923 started to go by Dr. F Donald Coster
• Used brothers Robert, George, and Arthur
• Expanded to much larger scale than Adelphi
Manufacturing (25,000 gls of alcohol a month
some toiletries had as much as 90% alcohol)
• Sold legitimate products that competed in
high-quality market
• Enforcers of Volstead Act could not find any
illegal practices
• Used Girard to hide illegal bootlegging
Moving to Bigger Things
• Price, Waterhouse, & CO selected as auditor in 1925 because
of inept accounting skills
• Recruited potential investors by Wining and Dining them on
his expensive yacht
• Clients too “dazzled” over profits to be curious how Dr. Coster
was doing it
• Turned $20,000 of investor money to $1million in 2 years
• Bought an 18 room mansion in Fairfield, Connecticut
• Created a fraudulent marriage license in 1926 to hide true
identity
• Bought Mckesson and Robbins in fall of 1926 for $1million
The actual Fraud
• Financial statement fraud
• Used multiple fake companies for receipts and invoices
• Embezzlement
How he did it all
• Put brothers in high-up positions within company
• Brothers would send fake documents using different
typewriters to various office locations
• Created fake subsidiary in Canada that sold fake inventories to
fake companies ( W.W. Smith that brother George ran)
• only brother George and Coster oversaw Canada Subsidiary
• Fake deposits were put into fake bank(Manning & Co) and
notified Mckesson accounting department
• Fake cash was hidden in receivables and inventory build up
• W.W smith was paid $18,000 a year plus .0075% commisson
Used Mckesson to hide bootlegging business(side cash)
Continued
• Sold stock from fake people to investors for $500,000 and had check
issued to himself
• Was charged with violating Clayton Anti-trust law, but was quickly
mysteriously dropped
• Stole $634,000 from company to hide personal investment losses
after terrible Tuesday in 1929(hid the stolen money by upping
inventories in Canada
• To prevent company from solvency, Coster performed legitimate
business practices as well as illegal ones
• Incidentally, our comptroller has called my attention to the fact
that payments for auditing fees paid by us since organization
to your good firm have reached the million mark. I am very
glad of it and feel that among the major expenses incidental to
mergers and consolidations only in auditing did our company
really get its money’s worth.
The Collaspe
• Treasurer Thompson grew wary of how Canadian Subsidiary
was so profitable yet had so much inventory ($18,000 million
in inventory and receivables in Canada)
• Company ordered in 1937 to sell $1-$2million of Canadian
inventory
• In 1938, Thompson found that Canadian inventory increased
and there was no insurance on it
• Mckesson and Robbins was paying W.W Smith instead of
Canadian Subsidiary
• Mckesson called in SEC to look over financial statements
• December 14th 1938 Coster and two of his brothers arrested in
his Fairfield home
How it could have been
prevented
•
•
•
•
Secure background checks of “Dr. Coster” and brothers
Segregation of duties within the company
Employees within company checking inventory
Price Waterhouse checking inventory levels
Red Flags
• Some of the potential red flags
• Build up of inventory in a Canadian warehouse that others had
never seen
• Receipts from customers were made to increase in receivables,
inventory, or payment to manning bank account
• Not even Himalayan must deer in the world to fill the orders
• Vanilla beans shipped in tins and not 200 lbs bags
• Amount of procaine or iodoform stored in Canada would supply
America for years
• Moved inventory from south America to Australia and china by
truck
• Pointed the auditors later in the year to not give them enough
time to examine the full extent of the operation
Aftermath
• Prosecuted by the SEC on financial statement
fraud
• The case mostly ended with the suicide of
Frank Musica
• Found out that Musica paid people who had
known him in in the past to keep quiet.
• Caused numerous turmoil in accounting
profession and for Price, Waterhouse & Co
• McKesson put into center of the conflict
Aftermath – Accounting
• Price, Waterhouse, & Co scrutinized by the SEC and the
populace for not detecting the fraud in the 12 years of
working with the firm
• SEC drew up new legislation now requiring physical count of
the inventory
• Now required Direct mail confirmation and physical test
mandatory audit procedures
• Changed the way the audit was reported
• To the stockholders
• Need to outline the procedures
• “Extension of auditing procedure” published to outline the
change in auditing standards
McKesson
• Stock dropped overnight from 7.50 to .50 cents
• Allegations of Little Brown Book and rumors of how he was
financing foreign wars
• Loss of public confidence
• Focus of public attention
McKesson
• Surprisingly, saw an increase in profits of $300,000 a quarter
the next year
• Welded the 66 local wholesale houses into a cohesive unit
Today
• McKesson Corporation is a fortune 500 company,
manufacturing of pharmaceutical technology/supplies
• Revenues of $120 Billion
• And total assets of $33 Billion