February 17, 2011
Acctg 723 – Advance Auditing
Prof. Arthur Dignam
Cases 3.5 Goodner Brothers, Inc.
Goodners Huntington sale office had no real internal control objectives. As stated in the case the controls were almost nonexistent and management was lax as it relates to controls. The objectives should have been in place by the company;
1. Reliable financial reporting ??“ the objective here is ensure that financial records, mainly accounts payable and accounts receivable, are correct and reliable ensuring that money is not being embezzled or posted to incorrect accounts.
2. Effective & Efficient operation ??“ the objective here is to have a minimum standard of operation that would provide a greater result in the end. Having more frequent performance reviews would aid in having a more efficient operation.
3. Compliance ??“ it should have been the objective of the company to see to it that all employees follow the rules of the company??™s internal controls and laws in general. Woody selling defective tires would be considered unlawful and could have cost the company in a law suit.
4. Safe guarding of Assets ??“ the objective here would be to minimize access to the company??™s assets and to maintain an accurate count of all tires.
Goodners Huntington unit had quite a number of weaknesses and seemingly had no measure in place for internal control. Such weaknesses are;
Control Environment ??“ The tone from the management created a major weakness. There was no sense of control in place since management in an effort to cut expense did not invest in proper control systems. Garcia admitted that his job is to sell tires and sell them as quickly as possible. So, the sales manager himself had no interest in the controls of inventory. The sense of the environment is that everything was based on trust.
Separation of duties ??“ Woody was simply too involved in many areas of the company. As the person making the sales with customers he should have never been allowed to delivery those same sales. Goodner should have hired a storage manager and as such woody should not have had full access to the storage facilities. Also woody should not have been able to carry out some of the functions of the bookkeeper. In essence woody had authorization and custody privileges.
Information processing controls ??“ Woody as a sales person had full access to the accounting system. As stated he was able to enter transactions directly into the system. As a result he was not only able to record sales but also credits & debits to a customers account as he so chooses. Such access should have only been given to the bookkeeper and the Sales manager.
One policy I would implement is to have every employee, including owners, undergo a yearly internal control class. At my current job with a federal agency it is mandatory for us to complete yearly classes on Information Technology and Sensitive Information. While the classes are the same every year, I believe it is still a good thing, because its shows the agencies commitment to protecting sensitive information. As such, the Goodner Brother Inc. should put in place such a policy to show their commitment to internal controls. In these classes employees will be reminded of the ramifications of theft which would serve as a deterrent. As another policy I would ensure that each employee??™s role is clearly defined. Sales representatives would have no access to the accounting record of customers. Upon review of complains and account discrepancies all necessary changes would have to be forwarded to the sales manager for authorization and then on to the bookkeeper for them to make the actual changes.
Woody took advantage of the company??™s control weaknesses but I believe Al Hunt, the external Auditors, T.J. Goodner & Ross Goodner were all partially responsible. Al Hunt knew that what Woody was doing was not right. He mentioned to woody that what he was doing would create a conflict of interest. He also, got confirmation from calling the manufacturing company about their close out sales practices and found out it occurs once every year, not at the frequency Woody had led him to believe. So with having two reasons that something was wrong he continued business with Woody and as such is an accessory to the theft. I give blame to the external auditors because they did their audit of Goodners year-end asset and liabilities without fully investigating the assertion of the existence of some of those assets. I give blame to T.J & Ross Goodner together because in an effort to save cost they did not invest in proper controls or created a good control environment. They showed no interest in internal control and were setting a bad example to the other managers. As such, Felix Garcia did not investigate the disproportionate complaints more and the internal auditors did not make as much visits to the companies storage facilities as they should have.