GOODNER BROS.

The lack of internal control.

Report By:
RAMEEZ MALIK

RON FIGARO








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SUMMARY

According the AICPA, companies are required to have great internal controls
in order to operate efficiently in todays economic market. There are companies out
there with lack of internal controls where their employees take full advantage of
that and start scheming. Internal control is the process of reasonable assurance that
requires a company to have reliable financial reporting, to comply with laws,
regulations, and policies. The importance of internal control is important because it
provides investors with information that they will take to make decisions like
investing in the company. Failure to do so will lead to frauds and errors that can be
committed by either the management team or the associates.
The case about the Goodner Brothers is a perfect example of lack of internal
controls delivered by the management team. The critical issue that resonates
throughout this case would be the absence of internal control measures they had in
place. Woody Wilson Robinson and Albert Leroy Hunt were two best friends who
grew up in the same neighborhood and went to college together and both
graduated with same degree, Business management. Al eventually found a job at his
future father in laws tire shop, Curcios Tires. Woody, through Als reference, was
able to land a job at Curcios tire dealer, Goodner Brothers. Woody was hired as a
sales representative, working on a commission basis. Everything was going according
to plan until his old habits from college started to kick in. Woody had gambling






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problems where he made deals that put him in debt in the past. He never learned
his lesson and continued betting on everything from sporting events to lottery
tickets. From excessive betting and gambling while working at Goodner Bros, he
ended up being in debt of an amount of $50,000. Worried about how he was going
to pay off his debtors, he came up with a solution of defrauding his company,
Goodner Bros. Based on his observation of the sloppy accounting system Goodner
Bros used; he took advantage of selling their inventory of tires to small private
retailers and keeping the profit for himself. After the year-end inventory count by
the associates of the shop, he tallied the number of the inventory and reduced the
difference of $20,000 to about less than $10,000. The manager, the accounting
personnel, and the internal auditors didnt notice this big change in the books of
operations. A few months later, the Internal auditors came to the company to do
their usual annual internal audits at the end of October 1997. Woody was unaware
of the fact that the auditors would come to the actual location to perform an audit
of the inventories, so he was shocked. The internal auditors found a huge difference
after a recount, of more than $250,000 between the actual and book inventory.
After the auditors confronted the sales manager, Mr. Felix Garcia, he denied any
involvement hence pinning him with gross negligence. Once Mr. Garcia was put on
leave, another round of auditors, except this time they were the independent
auditors, came to re-verify the inventory of tires. They also came up short of the
same amount, more than $250,000 and this time the independent auditors became
suspicious of Woody, the sales representative. Woody had tons of customer
complaints against him and once confronted with the uncovering of the fraud, he






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simply denied and asked for an attorney. Goodner Brothers filed a criminal
complaint against Woody Robinson two weeks after he refused to discuss the
inventory shortage. Woody received a five-year sentence for grand larceny but it
was cut down to seven months in a minimum-security prison because of his
confession of the fraud he committed. Even though Woody mentioned Al Hunt in his
confession, the judge didnt press charges against him. Goodner brothers had filed
an $185,000 lawsuit for the losses they faced and received $130,000 from the
companys insurer.

Critical Issue:
Lack of Internal Control leads to Fraud
Based on this case study, weve come to the realization that the critical issue
is the lack of internal control in Goodner Bros organization that leads to Fraud. The
consequences that Goodner bros had faced because of the lack of internal control
had made a negative impact on the company economically possibly leading to their
demise. The critical factors that show the poor internal controls within the company
are as follow:
When selling products at low prices and having low profit margins, Goodner
Brothers chose not to invest in internal controls. This was a major mistake
from Goodner Brothers because it is not possible for a company to perform
well without a good internal control. As a matter of fact, itd make more






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sense it they invested in their internal control operations by providing
programs and tools to help the sales representatives with their confidence in
order to bring more revenues in the company.
We believe that too many responsibilities were given to their employees. It is
important for companies to offer separation of duties in a company. The
sales reps had unrestricted access to their accounting system. The
bookkeepers or accounting personnel should have been the only persons
with access to the accounting system of the company.
The sales manager, Felix Garcia ignored the complaints from customers
against woody who was adding extra charges to customers monthly
statements. When the manager received the complaints, he passed them
along to the sales reps to deal with them themselves. That shows negligence
and lack of due care on behalf of the manager which lead to the
corporations economic loss.
The management of Goodner Bros shouldve relied on more than honesty
and integrity.
The lack of security at both warehouses gave woody the opportunity to easily
steal tires which made him increasingly bold. There were no cameras, no
security guards on site to assure the security of the inventory which shows
the lack of internal control from the management team.
Questions
1. List what you believe should have been the three to five key internal
control objectives of Goodners Huntington Sales Office?






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Based on the Public Company of Accounting Oversight Board, I believe that
the first key internal controls objective should have been to prevent Frauds.
According to COSO, in the compliance category, the management team must
comply with laws and regulations that affect the team and frauds committed
within the company which are not in accordance with the laws.
The second key internal objectives should be to safeguard the assets of the
business. In the financial reporting category, it states that the management
team must safeguard the assets of the company. There was no security or
supervision on the inventory of tires.
The third key internal objective should be to verify the accuracy of
accounting records. When the employees finished tallying the physical
inventory count, they had a shortage of $12,000 or 2.1 percent but Felix
didnt believe that the shortage was excessive so he ignored it. He should
have at least verified that information by recounting the inventory.
2. List the key internal control weaknesses that were evident in the
Huntington Units operation?

The first key internal control weaknesses that were evident in the
Huntington Units operation were the unrestricted access that two regular sales reps
had to the accounting system. The sales reps would write the sales invoices on
regular papers sometimes to give to the bookkeepers but when the bookkeepers
werent around, they were allowed to input information in the bookkeeping
software which is totally not their job. The second key internal control weakness was






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the Lack of supervision from the management team because Felix Garcia, the
manager, should have paid more attention to what was going on in the company.
Even when the customers made the complaints, he didnt care to look at it and just
pass it down to the reps. He only kept a copy of it because the previous manager
from three years ago told him to do so.
The third key internal weakness was the lack of security in the inventory of tires.
Woody was allowed to go the inventory room without any supervision. The
management team should have other security officials like security guards to
supervise on the activity that they were going on in the inventory room.

3. Develop one or more control policies or procedures to alleviate the control
weaknesses you identify in Question 2?

The first policy should be that no one other than the accounting personnel and
bookkeepers are allowed to have access to the accounting system in the company.
Original receipts should be kept in a unique folder or drawers and later on,
bookkeepers would enter those entries in the accounting software. The second
policy should be that Managers should perform Due care. Managers should stay on
top of every detail in the company. Complaints should be taken only from the
managements team and when they receive the complaints about their services or
employees, they shall deal with the complaints by investigating the issues and then
have a One on one session with the associate to resolve the issue so that it doesnt
repeat itself anymore. The third policy is that Inventory rooms must be highly






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secured. In order to do so, each inventory rooms should have guards that are
independent from the company to supervise on the ins and outs that takes place in
the inventory room on a 24 hour basis.

4. Besides Woody Robinson, what other parties were at least partially
responsible for the inventory losses Goodner suffered? Defend your
answer.


The parties that were partially responsible for the inventory losses besides woody
were the regional manager, Felix Garcia and the company bookkeeper. It was Felix
Garcia job as a manager to supervise all the activities the company did and manage
any mishaps that may have happened. He ignored the various complaints coming in
from customers about woody and he also ignored the fact that they had such a
discrepancy between their book and actual inventory. If he had actually paid
attention to that big difference maybe the woody wouldve been caught earlier and
the inventory losses, mitigated.
Also on the bookkeepers part, they should have been more keen and aware of the
information that they were putting in and the others who had access to the
accounting system. If they used due care, they would know anyone who had access
could manipulate that information and carry out their fraudulent activities.








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Work Cited
1. Case 3.5 Goodner Brothers, Inc.
2. Auditing and Assurance Services, 5th Custom Edition by Louwers