Auditors commonly fl nd themselves facing situations in which they must persuade client executives to do something they absolutely and resolutely do not want to do. When all else fails, auditors may be forced to use a tactic that clinical psychologists, marriage counselors, parents of toddlers, and other interpersonal experts typically frown upon; namely, the old-fashioned "if-you-don't-cooperate, I-will-punish-you" threat.In the mid-1990s, an exasperated team of Grant Thornton auditors resorted to threatening a stubborn client executive to goad him into turning over key documents hat had significant audit implications. The executive eventually capitulated and turned over the documents”which resulted in even more problems for the Grant Thornton auditors. The Brothers Greenberg For decades, Jack Greenberg oversaw a successful wholesale meat company, a company that he eventually incorporated and named after himself.
l Jack Greenberg, Inc. marketed a variety of meat, cheese, and other food products along the eastern seaboard of the United States from its Philadelphia headquarters. Jack Greenbergs failing health in the early 1980s prompted him to place his two sons in charge of the company's day-to-day operations. After their father's death, the two brothers, Emanuel and Fred, became equal partners in the business. Emanuel assumed the title of company president, while Fred became the company's vice president.
The two brothers and their mother made up the company's three-person board of directors.Several other members of the Greenberg family also worked in the business. Similar to many family-owned and -operated businesses, Jack Greenberg, Inc. 061), did not place a heavy emphasis on internal control. Like their father, the two Greenberg brothers relied primarily upon their own intuition and the competence and integrity f their key subordinates to manage and control their company's operations.
By the mid-1980s, when the privately owned business had annual sales measured in the tens of millions of dollars, Emanuel realized that JGI needed to develop a more formal accounting and control system.That realization convinced him to begin searching for a new company controller who had the expertise necessary to revamp JGl's outdated accounting function and to develop an appropriate network of internal controls for the growing company. In 1987, Emanuel hired Steve Cohn, a CPA and former auditor with Coopers & Lybrand, as JGl's controller. Cohn, who had extensive experience working with a variety of different inventory systems, immediately tackled the challenging assignment of creating a modern accounting and control system for JGI.Among other changes, Cohn implemented new policies and procedures that provided for segregation of key responsibilities within JGl's transaction cycles.
Cohn also integrated computer processing throughout most of JGl's operations, including the payroll, receivables, and payables modules of the company's accounting function. One of the more important changes that Cohn implemented was developing an nternal reporting system that produced monthly fl nancial statements the Greenbergs could use to make more timely and informed decisions for their fl nancial statements with the three banks that provided the bulk of the company's external fl nancing.By the early 1990s, JGI typically had a minimum of $10 million in outstanding loans from those banks. One area of JGl's operations that Cohn failed to modernize was the company's accounting and control procedures for prepaid inventory. Since the company's early days, imported meat products had accounted for a signifi cant portion of JGl's annual sales.
Because foreign suppliers required JGI to prepay for frozen meat items, the company maintained two inventory accounts, Prepaid Inventory and Merchandise Inventory.Prepayments for imported meat products were charged to the Prepaid Inventory account, while all other merchandise acquired by the company for resale was debited to the Merchandise Inventory account. Prepaid inventory typically accounted for 60 percent of JGl's total inventory and 40 percent of the company's total assets. Long before Cohn became JGl's controller, Jack Greenberg had given his son Fred complete responsibility for the urchasing, accounting, control, and other decisions affecting the company's prepaid inventory.Following their father's death, the two brothers agreed that Fred would continue overseeing JGl's prepaid inventory. When Cohn attempted to restructure and computerize the accounting and control procedures for prepaid inventory, Fred refused to cooperate.
Despite frequent and adamant pleas from Cohn over a period of several years, Emanuel refused to order his younger brother to cooperate with Cohn's modernization plan for JGI's accounting system. Accounting for Prepaid Inventory Fred Greenberg processed the purchase orders for meat products that JGI bought from foreign vendors.The items purchased were inspected by the appropriate authority in the given country and then loaded into refrigerated lockers to be transported by boat to the United States. When a vendor provided documentation to IGI that a shipment was in transit, Fred Greenberg approved payment of the vendor's invoice. These payments, as noted earlier, were charged or debited to JGl's Prepaid Inventory account.
Fred Greenberg maintained a handwritten accounting record nown as the prepaid inventory log to keep track of the items included in the Prepaid Inventory account at any point in time.
