CASE 3.

Goodner Brothers, Inc.

“Woody, that’s $2,400 you owe me. Okay? We’re straight on

that?” “Yeah, yeah. I got you.”
“And you’ll pay me back by next Friday?”
“Al. I said I’d pay you back by Friday,
didn’t I?” “Just checkin’.”
Borrowing money from a friend can strain even the strongest relationship.
When the borrowed money will soon be plunked down on a blackjack table, the
impact on the friendship can be devastating.
Woody Robinson and Al Hunt were sitting side by side at a blackjack table in
Tunica, Mississippi. The two longtime friends and their wives were spending their
summer vaca- tions together as they had several times. After three days of loitering
in the casinos that line the banks of the Mississippi River 20 miles south of
Memphis, Woody found himself hitting up his friend for loans. By the end of the
vacation, Woody owed Al nearly $5,000. The question facing Woody was how he
would repay his friend.1

Two Pals Named Woody and Al

Woodrow Wilson Robinson and Albert Leroy Hunt lived and worked in
Huntington, West Virginia, a city of 60,000 tucked in the westernmost
corner of the state. The blue-collar city sits on the south bank of the Ohio
River. Ohio is less than one mile away across the river, while Kentucky can
be reached by making a 10-minute drive westward on Interstate 64. Woody
and Al were born six days apart in a small hospital in eastern Kentucky, were
best friends throughout grade school and high school, and roomed together for
four years at college. A few months after they graduated with business
management degrees, each served as the other’s best man at their respective
weddings.
Following graduation, Al went to work for Curcio’s Auto Supply on the
western out- skirts of Huntington, a business owned by his future father-in-law.
Curcio’s sold lawn- mowers, bicycles, and automotive parts and supplies,
including tires and batteries, the business’s two largest revenue producers.
Curcio’s also installed the automotive parts it sold, provided oil and lube
service, and performed small engine repairs.
Within weeks of going to work for Curcio’s, Al helped Woody land a job with a
large tire wholesaler that was Curcio’s largest supplier. Goodner Brothers, Inc.,
sold tires of all types and sizes from 14 locations scattered from southern New
York to northwest- ern South Carolina and from central Ohio to the Delaware
shore. Goodner concen- trated its operations in midsized cities such as
Huntington, West Virginia; Lynchburg, Virginia; Harrisburg, Pennsylvania; and
Youngstown, Ohio, home to the company’s headquarters. Founded in 1969 by
two brothers, T. J. and Ross Goodner, nearly three decades later Goodner
Brothers’ annual sales approached $40 million. The Goodner family dominated
the company’s operations. T. J. served as the company’s chairman of
234 SECTION THREE INTERNAL CONTROL ISSUES
1. The central facts of this case were drawn from a legal opinion issued in the 1990s. The names of
the actual parties involved in the case and the relevant locations have been changed. Additionally,
certain of the factual circumstances reported in this case are fictionalized accounts of background
material disclosed in the legal opinion.

233
the board and chief executive officer (CEO), while Ross was the chief operating
officer (COO). Four second-generation Goodners also held key positions in the
company.
Goodner purchased tires from several large manufacturers and then
wholesaled those tires to auto supply stores and other retailers that had auto
supply departments. Goodner’s customers included Sears, Wal-Mart, Kmart, and
dozens of smaller retail chains. The company also purchased discontinued tires
from manufacturers, large retailers, and other wholesalers and then resold those
tires at cut-rate prices to school districts, municipalities, and to companies with
small fleets of automobiles.
Goodner Brothers hired Woody to work as a sales representative for its
Huntington location. Woody sold tires to more than 80 customers in his sales
region that stretched from the west side of Huntington into eastern Kentucky
and north into Ohio. Woody, who worked strictly on a commission basis, was an
effective and successful salesman. Unfortunately, a bad habit that he acquired
during his college days gradually developed into a severe problem. By the mid-
1990s, a gambling compulsion threatened to wreck the young salesman’s career
and personal life.
Woody bet on any and all types of sporting events, including baseball and
foot- ball games, horse races, and boxing matches. He also spent hundreds of
dollars each month buying lottery tickets and lost increasingly large sums on
frequent gambling excursions with his friend Al. By the summer of 1996 when
Woody, Al, and their wives visited Tunica, Mississippi, Woody’s financial
condition was des- perate. He owed more than $50,000 to the various bookies
with whom he placed bets, was falling behind on his mortgage payments, and
had “maxed out” several credit cards. Worst of all, two bookies to whom
Woody owed several thousand dollars were demanding payment and had
begun making menacing remarks that alluded to his wife, Rachelle.

Woody Finds a Solution

Upon returning to Huntington in early July 1996, Woody struck upon an idea to
bail him out of his financial problems: he decided to begin stealing from his
employer, Goodner Brothers. Other than a few traffic tickets, Woody had never
been in trouble with law enforcement authorities. Yet, in Woody’s mind, he
had no other reasonable alternatives. At this point, resorting to stealing
seemed the lesser of two evils.
One reason Woody decided to steal from his employer was the ease with
which it could be done. After several years with Goodner, Woody was very
familiar with the company’s sloppy accounting practices and lax control over
its inventory and other assets. Goodner’s executives preached one dominant
theme to their sales staff: “Vol- ume, volume, volume.” Goodner achieved its
ambitious sales goals by undercutting competitors’ prices. The company’s
dominant market share in the geographical re- gion it served came at a high
price. Goodner’s gross profit margin averaged 17.4 per- cent, considerably below
the mean gross profit margin of 24.1 percent for comparable tire wholesalers. To
compensate for its low gross profit margin, Goodner scrimped on operating
expenses, including expenditures on internal control measures.
The company staffed its 14 sales outlets with skeletal crews of 10 to 12
employees. A sales manager supervised the other employees at each outlet
and also worked a sales district. The remaining staff typically included two
sales representatives, a receptionist who doubled as a secretary, a
bookkeeper, and five to seven employees who delivered tires and worked in
the unit’s inventory warehouse. Goodner’s Hun- tington location had two
storage areas, a small warehouse adjacent to the sales of- fice and a larger
storage area two miles away that had previously housed a discount grocery
store. Other than padlocks, Goodner provided little security for its tire inven- tory,
which typically ranged from $300,000 to $700,000 for each sales outlet.
CASE 3.5 GOODNER BROTHERS, INC. 23

Instead of an extensive system of internal controls, T. J. and Ross Goodner

relied heavily on the honesty and integrity of the employees they hired.
Central to the com- pany’s employment policy was never to hire someone
unless that individual could provide three strong references, preferably from
reputable individuals with some connection to Goodner Brothers. Besides
following up on employment references, Goodner Brothers obtained thorough
background checks on prospective employees from local detective agencies.
For more than two decades, Goodner’s employment strategy had served the
company well. Fewer than 10 of several hundred individuals employed by the
company had been terminated for stealing or other misuse of com- pany assets
or facilities.
Each Goodner sales outlet maintained a computerized accounting system.
These systems typically consisted of an “off-the-shelf” general ledger package
intended for a small retail business and a hodgepodge of assorted accounting
documents. Besides the Huntington facility’s bookkeeper, the unit’s sales
manager and two sales repre- sentatives had unrestricted access to the
accounting system. Since the large volume of sales and purchase transactions
often swamped the bookkeeper, sales representa- tives frequently entered
transactions directly into the system. The sales reps routinely accessed, reviewed,
and updated their customers’ accounts. Rather than completing purchase orders,
sales orders, credit memos, and other accounting documents on a timely basis,
the sales reps often jotted the details of a transaction on a piece of scrap
paper. The sales reps eventually passed these “source documents” on to the
book- keeper or used them to enter transaction data directly into the
accounting system.
Sales reps and the sales manager jointly executed the credit function for each
Good- ner sales outlet. Initial sales to new customers required the approval of
the sales man- ager, while the creditworthiness of existing clients was monitored
by the appropriate sales rep. Sales reps had direct access to the inventory
storage areas. During heavy sales periods, sales reps often loaded and delivered
customer orders themselves.
Each sales office took a year-end physical inventory to bring its perpetual
inven- tory records into agreement with the amount of inventory actually on
hand. One concession that T. J. and Ross Goodner made to the policy of
relying on their em- ployees’ honesty was mandating one intra-year inventory
count for each sales office. Goodner’s management used these inventories,
which were taken by the company’s two-person internal audit staff, to monitor
inventory shrinkage at each sales outlet. Historically, Goodner’s inventory
shrinkage significantly exceeded the industry norm. The company occasionally
purchased large shipments of “seconds” from manufac- turers; that is, tires with
defects that prevented them from being sold to major retail- ers. The tires in
these lots with major defects were taken to a tire disposal facility. A sales
office’s accounting records were not adjusted for these “throwaways” until the
year-end physical inventory was taken.

Selling Tires on the Sly

Within a few days after Woody hatched his plan to pay off his gambling debts,
he visited the remote storage site for the Huntington sales office. Woody
rummaged through its dimly lit and cluttered interior searching for individual
lots of tires that apparently had been collecting dust for several months. After
finding several stacks of tires satisfying that requirement, Woody jotted down
their specifications in a small notebook. For each lot, Woody listed customers
who could potentially find some use for the given tires.
Later that same day, Woody made his first “sale.” A local plumbing supply
23 SECTION THREE INTERNAL CONTROL ISSUES
dealer needed tires for his small fleet of vehicles. Woody convinced the
business’s owner that Goodner was attempting to “move” some old inventory.
That inventory would
be sold on a cash basis and at prices significantly below Goodner’s cost. The
owner agreed to purchase two dozen of the tires. After delivering the tires in
his large pickup, Woody received a cash payment of $900 directly from the
customer.
Over the next several months, Woody routinely stole inventory and kept the
pro- ceeds. Woody concealed the thefts in various ways. In some cases, he
would charge merchandise that he had sold for his own benefit to the accounts
of large volume cus- tomers. Woody preferred this technique since it allowed
him to reduce the inventory balance in the Huntington facility’s accounting
records. When customers complained to him for being charged for merchandise
they had not purchased, Woody simply apologized and corrected their account
balances. If the customers paid the improper charges, they unknowingly helped
Woody sustain his fraudulent scheme.
Goodner’s customers frequently returned tires for various reasons. Woody
com- pleted credit memos for sales transactions voided by his customers, but
instead of returning the tires to Goodner’s inventory, he often sold them and
kept the proceeds. Goodner occasionally consigned tires to large retailers for
promotional sales events. When the consignees returned the unsold tires to
Goodner, Woody would sell some of the tires to other customers for cash.
Finally, Woody began offering to take throw- aways to the tire disposal facility
in nearby Shoals, West Virginia, a task typically assigned to a sales outlet’s
delivery workers. Not surprisingly, most of the tires that Woody carted off for
disposal were not defective.
The ease with which he could steal tires made Woody increasingly bold. In
late 1996, Woody offered to sell Al Hunt tires he had allegedly purchased from
a manu- facturer (by this time, Al owned and operated Curcio’s Tires). Woody
told Al that he had discovered the manufacturer was disposing of its inventory
of discontinued tires and decided to buy them himself. When Al asked whether
such “self-dealing” violated Goodner company policy, Woody replied, “It’s none
of their business what I do in my spare time. Why should I let them know about
this great deal that I stumbled upon?”
At first reluctant, Al eventually agreed to purchase several dozen tires from his
good friend. No doubt, the cut-rate prices at which Woody was selling the tires
made the decision much easier. At those prices, Al realized he would earn a
sizable profit on the tires. Over the next 12 months, Woody continued to sell
“closeout” tires to his friend. After one such purchase, Al called the
manufacturer from whom Woody had reportedly purchased the tires. Al had
become suspicious of the frequency of the closeout sales and the bargain
basement prices at which Woody supposedly purchased the tires. When he
called the manufacturer, a sales rep told Al that his company had only one
closeout sale each year. The sales rep also informed Al that his company sold
closeout merchandise directly to wholesalers, never to individuals or retail
establishments.
The next time Al spoke to Woody, he mentioned matter-of-factly that he had
con- tacted Woody’s primary supplier of closeout tires. Al then told his friend
that a sales rep for the company indicated that such merchandise was only sold
to wholesalers.
“So, what’s the point, Al?”
“Well, I just found it kind of strange that, uh, that .
. .” “C’mon, get to the point, Al.”
“Well, Woody, I was just wondering where you’re getting these tires that
you’re selling.”
“Do you want to know, Al? Do you really want to know, Buddy? I’ll tell you if
you want to know,” Woody replied angrily.
 After a lengthy pause, Al shrugged his shoulders and told his friend to “just
forget it.” Despite his growing uneasiness regarding the source of the cheap
tires, Al contin- ued to buy them and never again asked Woody where he was
obtaining them.
Internal Auditors Discover Inventory Shortage
On December 31, 1996, the employees of Goodner’s Huntington location met to
take a physical inventory. The employees treated the annual event as a
prelude to their New Year’s Eve party. Counting typically began around noon
and was finished within three hours. The employees worked in teams of three.
Two members of each team climbed and crawled over the large stacks of tires
and shouted out their counts to the third member who recorded them on
preformatted count sheets.
Woody arranged to work with two delivery workers who were relatively
unfamiliar with Goodner’s inventory since they had been hired only a few
weeks earlier. Woody made sure that his team was one of the two count teams
assigned to the remote stor- age facility. Most of the inventory he had stolen
over the previous six months had been taken from that site. Woody estimated
that he had stolen approximately $45,000 of inventory from the remote storage
facility, which represented about 10 percent of the site’s book inventory. By
maintaining the count sheets for his team, Woody could easily inflate the
quantities for the tire lots that he and his team members counted.
After the counting was completed at the remote storage facility, Woody
offered to take the count sheets for both teams to the sales office where the
total inventory would be compiled. On the way to the sales office, he stopped
in a vacant parking lot to review the count sheets. Woody quickly determined
that the apparent shortage remaining at the remote site was approximately
$20,000. He reduced that shortage to less than $10,000 by altering the count
sheets prepared by the other count team.
When the year-end inventory was tallied for Goodner’s Huntington location,
the difference between the physical inventory and the book inventory was
$12,000, or
2.1 percent. That percentage exceeded the historical shrinkage rate of approximately
1.6 percent for Goodner’s sales offices. But Felix Garcia, the sales manager for
the Huntington sales office, did not believe that the 1996 shrinkage was
excessive. As it turned out, neither did the accounting personnel and internal
auditors at Goodner’s corporate headquarters.
Woody continued “ripping off” Goodner throughout 1997. By midyear, Woody
was selling most of the tires he stole to Al Hunt. On one occasion, Woody
warned Al not to sell the tires too cheaply. Woody had become concerned that
Curcio’s modest prices and its increasing sales volume might spark the
curiosity and envy of other Huntington tire retailers.
In October 1997, Goodner’s internal audit team arrived to count the
Huntington location’s inventory. Although company policy dictated that the
internal auditors count the inventory of each Goodner sales outlet annually,
the average interval be- tween the internal audit inventory counts typically
ranged from 15 to 20 months. The internal auditors had last counted the
Huntington location’s inventory in May 1996, two months before Woody
Robinson began stealing tires. Woody was unaware that the internal auditors
periodically counted the entire inventory of each Goodner oper- ating unit.
Instead, he understood that the internal auditors only did a few test counts
during their infrequent visits to the Huntington sales office.
After completing their inventory counts, the two internal auditors arrived at
an in- ventory value of $498,000. A quick check of the accounting records
revealed a book inventory of $639,000. The auditors had never encountered
such a large difference between the physical and book inventory totals. Unsure
what to do at this point, the auditors eventually decided to take the matter
directly to Felix Garcia, the Huntington sales manager. The size of the inventory
shortage shocked Garcia. He insisted that the auditors must have overlooked
some inventory. Garcia, the two internal auditors, and three delivery workers
spent the following day recounting the entire inventory.
The resulting physical inventory value was $496,000, $2,000 less than the
original value arrived at by the auditors.
Following the second physical inventory, the two internal auditors and Garcia
met at a local restaurant to review the Huntington unit’s inventory records. No
glaring trends were evident in those records to either Garcia or the auditors.
Garcia admitted to the auditors that the long hours required “just to keep the
tires coming and going” left him little time to monitor his unit’s accounting
records. When pressed by the auditors to provide possible explanations for the
inventory shortage, Garcia erupted. “Listen. Like I just said, my job is simple. My
job is selling tires. I sell as many tires as I can, as quickly as I can. I let you guys
and those other suits up in Youngstown track the numbers.”
The following day, the senior internal auditor called his immediate superior,
Good- ner’s chief financial officer (CFO). The size of the inventory shortage
alarmed the CFO. Immediately, the CFO suspected that the inventory shortage was
linked to the Hunting- ton unit’s downward trend in monthly profits over the
past two years. Through 1995, the Huntington sales office had consistently
ranked as Goodner’s second or third most profitable sales outlet. Over the past
18 months, the unit’s slumping profits had caused it to fall to the bottom one-
third of the company’s sales outlets in terms of profit margin percentage. Tacking
on the large inventory shortage would cause the Huntington loca- tion to be
Goodner’s least profitable sales office over the previous year and one-half.
After discussing the matter with T. J. and Ross Goodner, the CFO contacted
the company’s independent audit firm and arranged for the firm to investigate
the inven- tory shortage. The Goodners agreed with the CFO that Felix Garcia
should be sus- pended with pay until the investigation was concluded. Garcia’s
lack of a reasonable explanation for the missing inventory and the anger he
had directed at the internal auditors caused Goodner’s executives to conclude
that he was likely responsible for the inventory shortage.
Within a few days, four auditors from Goodner’s independent audit firm
arrived at the Huntington sales office. Goodner’s audit firm was a regional CPA
firm with six offices, all in Ohio. Goodner obtained an annual audit of its
financial statements be- cause one was demanded by the New York bank that
provided the company with a line of credit. Goodner’s independent auditors
had never paid much attention to the internal controls of the client’s sales
offices. Instead, they performed a “balance sheet” audit that emphasized
corroborating Goodner’s year-end assets and liabilities.
During their investigation of the missing inventory, the auditors were
appalled by the Huntington unit’s lax and often nonexistent controls. The
extensive control weaknesses complicated their efforts to identify the source of
the inventory shortage. Nevertheless, after several days, the auditors’
suspicions began settling on Woody Robinson. A file of customer complaints
that Felix Garcia kept in his desk revealed that over the past year an unusually
large number of customer complaints had been filed against Woody. During
that time, 14 of his customers had protested charges in- cluded on their
monthly statements. Only two customers serviced by the other sales rep had
filed similar complaints during that time frame.
When questioned by the auditors, Garcia conceded that he had not discussed
the customer complaints with Woody or the other sales rep. In fact, Garcia was
unaware that a disproportionate number of the complaints had been filed
against Woody. When Garcia received a customer complaint, he simply passed
it on to the appropri- ate sales rep and allowed that individual to deal with the
matter. He maintained a file of the customer complaints only because he had
been told to do so by the previous sales manager whom he had replaced three
years earlier.
 After the independent auditors collected other incriminating evidence
against Woody, they arranged for a meeting with him. Also attending that
meeting were
 Goodner’s CFO and Felix Garcia. When the auditors produced the incriminating
evi- dence, Woody disclaimed any knowledge of, or responsibility for, the inventory
short- age. Woody’s denial provoked an immediate and indignant response from
Goodner’s CFO. “Listen, Robinson, you may have fooled the people you’ve been
working with, but you’re not fooling me. You’d better spill the beans right
now, or else.” At this point, Woody stood, announced that he was retaining an
attorney, and walked out of the meeting.

EPILOGUE
Goodner Brothers filed a criminal Hunt extensively, he decided not to file
complaint against Woody Robinson two criminal charges against him.2
weeks after he refused to discuss the Goodner Brothers filed a $185,000
inventory shortage at the Huntington sales insur- ance claim to recoup the losses
office. A few weeks later, Woody’s attorney resulting from Woody’s thefts. The company’s
reached a plea bargain agree- ment with the insurer eventu- ally paid Goodner $130,000,
local district attorney. Woody received a which equaled the theft losses that Goodner
five-year sentence for grand larceny, four could document. After settling the claim, the
years of which were suspended. He even- insurance company sued Curcio’s Tires and Al
tually served seven months of that sentence Hunt to recover the $98,000 windfall that
in a minimum-security prison. A condition of Curcio’s allegedly realized due to Al Hunt’s
the plea bargain agreement required Woody involvement in the theft ring. The case went
to pro- vide a full and candid written to federal district court where a judge or-
summary of the fraudulent scheme that he dered Hunt to pay $64,000 to Goodner’s
had perpetrated on his employer. insurer. Al Hunt then sued Woody Robinson
Woody’s confession implicated Al Hunt in to recover that judgment. The judge who
his theft scheme. Over the 15 months that presided over the earlier case quickly
Woody had stolen from Goodner, he had dismissed Al Hunt’s lawsuit. According to the
“fenced” most of the stolen inventory judge, Al Hunt’s complicity in the fraudulent
through Curcio’s Tires. Although the scheme voided his right to recover the
district attorney questioned Al $64,000 judgment from his former friend.

Questions
1. List what you believe should have been the three to five key internal
control objectives of Goodner’s Huntington sales office.
2. List the key internal control weaknesses that were evident in the
Huntington unit’s operations.
3. Develop one or more control policies or procedures to alleviate the
control weaknesses you identified in responding to Question 2.
4. Besides Woody Robinson, what other parties were at least partially
responsible for the inventory losses Goodner suffered? Defend your
answer.

2. Ironically, Woody’s confession also implicated his wife, Rachelle. After Woody revealed that
Rachelle had typically deposited the large checks written to him by Al Hunt, the district attorney
reasoned that Rachelle must have been aware of Woody’s fraudulent scheme and was thus an
accessory to his crime. However, Woody insisted that he had told his wife the checks were for
gambling losses owed to him by Al. After interrogating Rachelle at length, the district attorney
decided not to prosecute her.
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