Goodner Brothers

Fraud Risk Exposures

There are many different fraud risk exposures that a tire wholesaler, like Goodner Brothers, is exposed to. The first exposure I will talk about is the one that occurred in this case, theft of assets. This is of high significance as well as high likelihood for a tire wholesaler with lax internal controls. The opportunity for the employees to steal tires is extremely high due to the unrestricted access to inventory. This exposure can also be potentially significant, as seen in this case, because an employee can go about committing this fraud for a long period of time.

The second fraud risk exposure I want to talk about is the opportunity of overstating revenues and/or inventory. Goodner Brothers have very poor internal controls surrounding their documentation process. This makes it very hard to trace what actually sparked a transaction that increased revenue. The majority of the time, sales reps would just jot down a particular order on a scrap piece of paper and give it to the bookkeeper. This would be nearly impossible for an auditor to come in and trace back to an actual sale. Since this is such a common practice in Goodner Brothers, it is highly likely that one could just make up a series of "sales" transactions that didn't actually occur.

The last fraud risk exposure I want to talk about is the chance of an employee getting into a purchasing kickback agreement with a vendor that he or she decides to overcharge. Although this lacks on the likelihood side of the spectrum, it could be highly significant when it comes to dollar value. All it would take is a guy like Woody to reach an agreement with one of the tire manufacturers. This agreement would entail the manufacturer overcharging Goodner Brothers for the tires; meanwhile Woody and the manufacturer would split the proceeds from the sale. Goodner Brothers is specifically exposed to this because of their lack of controls surrounding access to the accounting system. Woody could go into the system and approve any amount that the manufacturer decided to charge.

Internal Control Weaknesses

Goodner Brothers were not known for their stern internal controls. As a matter of fact, they actually tried to reduce their operating costs by focusing less on internal control. The company had lax control over its inventory and it was rather sloppy when it came to the accounting side of the business. The reason for all of this is because they were focused more on volume and gaining market share.

One of the main internal control weaknesses was the fact they the company had faith in their employees. Goodner Brothers felt that, as long as they required solid references and performed a background check, that they could rely on the honesty and integrity of everyone they fired. There were approximately 10 to 12 workers at each facility. Each facility was made up of a sales manager, a few sales representatives, a receptionist, and about five to seven employees who delivered tires and worked in the warehouse.

Another internal control weakness deals with the access to the accounting system. Not only did the secretary have access to the accounting system, but the sales manager and sales representatives also had unrestricted access. Whenever the bookkeeper was swamped with sale and purchase transactions, the sales reps would step in and enter transactions directly into the system. This was a violation of segregation of duties. The sales reps also routinely accessed, reviewed, and updated their customer accounts. Instead of completing valid documentation such as purchase orders, sales orders, or credit memos, the sales reps would jot down the details of a transaction on a piece of paper and pass them onto the bookkeeper for entering. Aside from all of the access issues, the accounting system that they have in place is an "off-the-shelf" general ledger package that is intended for a small retail business. This is generally not a problem if the company is small enough but Goodner Brothers needs to have a system in place that allows there to be restriction capabilities.

A third internal control weakness has to do with the lack of security surrounding its tire inventory. One of the main types of exposures for any kind of wholesaler is asset theft. Goodner had approximately $300,000 to $700,000 worth of inventory at each of its sales outlets. Since their whole business is surrounded by selling that inventory, it is a necessity to make sure they safe guard it. Along the same lines of safeguarding their inventory, Sales reps should have never been allowed to load and deliver customer orders themselves.

The company should also put more controls in place in regards to counting their inventory. An inventory count that only takes place once a year increases the chances of inventory shrinkage occurring.

With all of these lax internal controls, Woody was able to steal and sell tires from Goodner Brothers. Since the company was so trustworthy of their employees, it was easy for Woody to manipulate the system. The second thing that helped him was the access he was allowed to the accounting system. He was able to go into the system and charge the tires he sold, for his own personal gain, to large volume customers. Not only was this easy to do but it also allowed him to reduce the inventory that the Huntington facility had on their books. From there, it was up to the customer to notice the charges. If they did notice, Woody would simply apologize and correct their account balances. If it went unnoticed, the customers unknowingly helped Woody get away with this fraudulent scheme. Lastly, the access to the inventory itself aided Woody in the sense that there was nothing restricting him from stealing the tires. The company should restrict access to the inventory to those who are loading and delivering the orders.

Other Parties Responsible

When examining this fraud, it is clear the Woody was not the only party responsible for the existence of this fraud. It was primarily the company as a whole that allowed Woody to come up with this fraud. However, it can be more narrowed down to a few other people. First off, Felix Garcia can be considered somewhat responsible. He was the sales manager at the Huntington facility. If he would have paid a little more attention to managing the store rather than keeping the tires coming and going out the door, it would have been fairly easy to notice something wasn't right. Any customer complaint that came in went straight to Felix. From there he would then pass off the complaint to the respective sales representative. What he failed to noticed is the amount of complaints that were coming in that dealt with incorrect invoice amounts. There