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Goodner Brothers set ambitious sales goals. In order to achieve these goals, they were known to undercut their competitor’s prices. In the text, it is pointed out that “To compensate for low gross profit margin, Goner scrimped on operating expenses, including expenditures on internal control measures. ” Goodner Brothers should have not saved on internal control measures so they could have caught Woody stealing their inventory. Goodner Brother’s should have had more employees to have an appropriate check and balances strategy.
The bookkeeper should have been the one entering invoices into the computer while having someone check her work to make sure no fraudulent activity took place. Having Woody enter inaccurate amounts of orders into the computer allowed him to steal the vast amounts of inventory. Also, Goodner Brothers should have had two executives approve the purchase of inventory from wholesalers. When Woody brought inventory from a fictitious outside wholesaler, Al should have had another executive sign off on the approval of the transaction.
Then Al would not have had a conflict of interest with dealing with his friend Woody’s fraudulent activity.
Finally, Goodner Brothers should have kept a closer eye on their inventory. They needed someone to watch over the inventory at all times. Perhaps Goodner should have had a guard who would only let deliverymen and sale reps enter the ware house if they had the proper invoices to do so. There were a lot of internal control weaknesses at Goodner Brothers. They should have had implemented proper internal control measures in order to prevent the fraud committed by Woody.
Goodner Brothers lack of internal controls is an example of what auditors look for when they begin an audit of a company.
In the article Revisiting Materiality, Gist and Shastri point out that an audit staff can reduce audit failures if they act with due care. In order to act in due care, the staff needs to maintain an attitude of professional skepticism at a heightened level. Professional skepticism requires auditors “need to be alert to patterns and situations of material misstatement due to error or fraud, remain alert to internal control weaknesses that increase the risk of fraudulent activities, and management bias that increases the risk of fraudulent financial reporting. Al’s lack of action caused Woody to steal a large amount of inventory. An audit staff would have been able to catch Woody in the act of theft if they acted with due care and used professional skepticism during the audit. 2. Goodner’s had no true internal controls set up at the regional offices * The owners trusted employees because of background checks. * Insufficient control consciousness within the organization, for example, the tone at the top and the control environment. * Absent or inadequate segregation of duties within a significant account or process. Absent or inadequate controls over the safeguarding of assets (this applies to controls that the auditor determines would be necessary for effective internal control over financial reporting). * The absence of an internal process to report deficiencies in internal control to management on a timely basis. * Sales people were allowed to collect payments. * Sales people were allowed to deliver tires. 3. The best thing the Goodner’s could have done would be to set up controls separate duties.
If Woody wouldn’t have been allowed to deliver products or collect the payments this never could have happened. Woody should have been able to issue the sale, but a delivery team should drop off the tires and the customer should have to send the payment in to the sales department or accounts receivable department. The second control policy would be to keep inventories more secure. Goodner’s should set up a position in the inventory department that all they do is allow for inventory to be put in the warehouse or released. Keeping track of all transactions that deal with inventory.
If Goodner would have had better controls on their inventory, Woody never would have been able to go through the warehouse and pick and choose items that he could easily hide off the books. A third policy that Goodner should have set up is never allowing employees who deal with sales to do the year-end inventory check. Only auditors should be allowed to do the year-end inventory check. This weeks article “When the Boss Trumps Internal Controls”, perfectly goes along with what could be prevented if proper internal controls were inline and properly practiced.
In the article the president clearly saw weaknesses in the accounting system and took advantage of everything she could. The exact same thing Woody did to the Goodner brothers. All of this could have been prevented if the internal controls were properly inforced. 4. A lot of people were partially responsible for Goodner Brothers, Inc. losses. First was the company’s management. The company provided very minimum security for its inventory. With just padlocks and no one to protect its inventory, everyone could access the warehouse and leave with tires without any records of that person being ever there.
Also, it seems like the company did not practice job rotation. With just 10 to 12 employees for every sales outlet, the employees were founding themselves having multiples responsibilities in the same company. For example the sale manager was also the sale district. The people in charge of the sales were also the ones teaming up to hand-count the inventory. In addition, they were no internal control because the company relied on the honesty and integrity of their employees.
The sales representatives were allowed to enter transactions directly into the system and access customers’ account and do all the modifications they wanted to do without any limit. Another person partially responsible for the situation was Al Hunt. As Woody’s friend, he should have asked him more seriously about how and where he was getting the tires, and when he realized that his friend was maybe involved in a fraudulent activity, he should have stopped buying tires from him and tried to talk him out of this situation. But instead, he pretended that there was nothing strange happening and just kept buying from him.
Finally, Felix Garcia the sales manager for the Huntington Sales Office is also responsible for the losses of the company. As the sale manager, he never contacted any customers about their complaints and just let subordinates deal with those issues. When in 1996, the inventory shrinkage represented 2. 1 percent of the inventory, he did not think it was excessive and did nothing to understand this shrinkage. He believed that his only job was to sell tires and that was it so he never investigated any strange situation happening in the company.
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