Goodner BrothersEssay Preview: Goodner BrothersReport this essayFraud Risk ExposuresThere 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 didnt actually occur.
The biggest problem that happens with using this sort of “revenues and inventory” method is that there is no way to quantify it. All you can find is statistics, a couple of sources, estimates and a couple of cases that prove that you were right. I have seen a lot of people tell me, they had heard about the idea of using this method for some time but there wasn’t much traction. Since even the people who were talking about the idea were doing it on the web, there seems to be no actual understanding of how the method would work. For example, there are a few videos posted by the author and a small group of others that are very good. My own experience with this is that there are a couple of things that are difficult to evaluate: What are the expected cost per unit? What are the expected prices and time periods for the units that they sold? How much is a particular unit really worth? Are the prices “spent” and when is that actually a good indicator of what is in store? How many of these things (for example, how many inventory orders) has the seller paid and what kind of inventory has an oversold price? Here is an example of a different type of estimate about how I would see it going depending on the way I measured inventory volume:
In my experience, this has always been something that happened in the middle of writing a script, so it seems to be quite straightforward. But here’s another problem that many people are experiencing. If there is a price that is likely worth more than the actual sales price in its estimate, why would the seller charge you when the amount would be more reasonable if it was more like what the actual sales price was? I would think that any buyer who comes in early and pays a pretty high price is likely to spend the money on the product so just that would be the wrong way to proceed. As a result, you tend to spend a lot of your hard-earned money on things like the inventory and the items that are expected to be sold. Also, even though I have seen this behavior in other situations in the past, it seems to be rarer than the way you’d have it if you did the actual work.
Lastly, I am wondering about the “unrealistically large increase in inventory quantity” you have described earlier. That is a real question to ask myself and I can’t say my theory about this is correct in any way. My theory is that that when one buys a large inventory that is likely to be filled anytime soon. And even if many people do sell to the point it would take at least as long to replace it, it’s not going to generate any revenue. So, I believe that your estimates
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 WeaknessesGoodner 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 ResponsibleWhen 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 wasnt 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
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After he was finished, he was contacted by a number of customers in Huntington to inquire about their complaint. As an expert, I would tell you that it was much more difficult for someone to be contacted in terms of a request with “no response at all” being accepted in the matter. In short, the company did not look at the various issues at hand and simply took the complaint itself and brought it to a court to resolve. That said, the company never seemed to be bothered about the actual amount of money they paid out. All they reported was that a portion of the claims came from a very small number of customers who saw to it that they were receiving what they were asking for on the condition that no further complaints were being received.
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I know I stated in my answer to your question that, if it were allowed to go through Felix and his lawyers, the “fraud” this case probably wouldn’t even be mentioned in the record… However, it was a matter that was raised after the fact, and they did take the matter up with them. The problem here is that since most of this is the “money was not coming in” issue, or anything related to it, that is how Felix Garcia became involved with this crime.
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Well, at that point, he did realize that, “this has to be about money. My money is not coming in.” The amount involved was a question Felix never answered, and the truth was that he was paying someone else’s personal amount, and this was a criminal’s business. The question was whether the $10,000 was just fine and there should have been a $5,000 fine. And yet he still had to pay the person that filed the suit who took the money, and that would have been a violation of his contractual obligation to pay that $10,000. For once in his life, I truly believe that he did not want these things to stop, and, more importantly, yet he never asked a simple question that made any sense or was necessary for that sort of conversation with his lawyers.[…]
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So for the next 20 minutes, at the request of a customer, he just had to tell the company the matter for him and that was it. If it was only Felix’s money which had now been turned over to him, he would have had to tell them what he was doing, what had actually come into his account and be responsible. His lawyers made it just fine. I thought that would be the biggest and most productive way for the defendants to get around the laws that would allow them to take ownership of this business for their own financial purposes. But instead, he never bothered to say that something had gone wrong.[…]
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It is important to note here that I cannot find any written evidence anywhere in this case that suggests that there was any serious intent on the part of this defendant to violate law or any legal obligation to take a responsibility for something he didn’t believe he was having in mind.[…] By refusing to take responsibility, he made it very clear that the company was in an “act of willful mismanagement”. It has always been this way. As such, his lawyers tried to prove that, regardless of whether he personally paid these people compensation, that he did in fact personally know to no avail about