McKesson & Robbins scandal (1938)

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The McKesson & Robbins, Inc. scandal of 1938 was one of the major financial scandals of the 20th century. The company had been taken over in 1925 by Philip Musica, who had previously used Adelphia Pharmaceutical Manufacturing Company as a front for bootlegging operations. Musica, a twice-convicted felon, used assumed names to conceal his true identity in taking control of the two companies: Frank D. Costa at Adelphia Pharmaceutical and F. Donald Coster at McKesson & Robbins. Although he was successful in expanding the company’s legitimate business operations, Musica recruited three of his brothers, also working under assumed names, one outside the company and two inside it, to generate bogus sales documentation and to pay commissions to a shell distribution company under their control Eventually, McKesson & Robbins’ treasurer, Julian Thompson, discovered the distribution company was bogus. It was eventually determined that about $20 million of the $87 million in assets on the company’s balance sheet were phony.

In December, 1938, the Securities and Exchange Commission (SEC) opened an investigation and Musica was arrested. Only after he was booked, fingerprinted and released on bond did the authorities realize that “Coster” was in reality Musica. His bond was revoked and he committed suicide before he could be rearrested.

The McKesson & Robbins scandal led to major corporate governance and auditing reforms. The SEC required that public companies have audit committees of “outside” directors and that the appointment of auditors be approved by the shareholders. The American Institute of Accountants (now the American Institute of Certified Public Accountants) adopted audit standards requiring that auditors verify accounts receivable and inventory.

[edit] References

John C. Coffee, Gatekeepers: The Professions and Corporate Governance Oxford: Oxford Univ. Press (2006) ISBN 0199288097 pp. 139-140.

David Grayson Allen and Kathleen McDermott, Accounting for Success: A History of Price Waterhouse in America, 1890-1990 Boston: Harvard Business School Press (1993) ISBN 0875843285 pp. 75-83.

Paul M. Clikeman, “The Greatest Frauds of the (Last) Century,” monograph, May 2003, http://www.newaccountantusa.com/newsFeat/wealthManagement/Clikeman_Greatest_Frauds.pdf (accessed March 15, 2008).

Jerry W. Markham, A Financial History of Modern U.S. Corporate Scandals: From Enron to Reform Armonk, NY: M.E. Sharpe (2006) ISBN 0765615835, p. 171.