Jhonerl L. Ybañez BSA – 4 ACCTG 121C (Synthesis) Thursday 7:30-8:30 A.M.

JACK GREENBERG, INC.

I. Facts of the Case
 For decades, Jack Greenberg oversaw a successful wholesale meat company, a
company that he eventually incorporated and named after himself. Jack
Greenberg’s health in the early 1980s prompted him to place his two sons in charge
of the company. Emmanuel assumed the title of President and Fred, the vice
president. They became equal partners in the business and made up the three-
person Board of Directors together with their mother.
 Jack Greenberg Inc. (JGI), did not put heavy emphasis on internal control. Like
their father, they relied on intuition and competence of their key subordinates to
manage the company’s operation. When the privately owned business had tens of
millions of sales in mid 1980s, the realized they need a more formal accounting
and control systems. Emmanuel hired Steve Cohn, a former Cooper & Lybrand
auditor, as their controller.
 Cohn, the new controller, implemented new policies and procedures that provided
for segregation of duties and also developed an internal reporting system that
produced monthly financial statements. One area of JGI’s operations the Cohn
failed to modernize was the procedures for prepaid inventory. Because foreign
suppliers required JGI to prepay frozen meats, the company maintained two
inventory accounts, Prepaid Inventory and Merchandise Inventory.
 Fred Greenberg was responsible for the purchasing, accounting and other
decisions affecting the company’s prepaid inventory. When Cohn attempted to
restructure and computerize the procedures for Prepaid Inventory, Fred refused
to cooperate. Despite the pleas from Cohn over a period of years, Emmanuel also
refused to order his brother to cooperate with their controller.
 Fred Greenberg processed the purchase orders for meat products bought from
foreign vendors. Purchased items were inspected by appropriate authority in the
given country and is transported by boat in US. When foreign vendors provided
information about the goods in transit, Fred approved the payment of the vendor’s
invoice. This is then charged to the Prepaid Inventory account and is maintained
by him through a handwritten known as prepaid inventory log.
 When the shipment of goods arrived, a customs broker retained by JGI inspected
and approved entry into US. Upon arrival at JGI’s warehouse, U.S. Department of
Agriculture (USDA) inspected the items in the order with Form 9504-1 as a proof
that items arrived and passed the inspection.
 After the USDA inspection process, items are then forwarded to the JGI’s
warehouse. The warehouse manager sent the delivery receipt form to Fred
 Greenberg, who matched the form with the given vendor invoice. After which, he
deleted the item from prepaid inventory log and passed the receipt to Cohn, who
also processed an accounting entry that transferred Prepaid Inventory to
Merchandise Inventory.
 There is some risk that certain inventory items would be “double-counted” at year-
end. To reduce the risk, Cohn reconciled the prepaid inventory log by Fred to the
year-end balance of Prepaid Inventory account. When Cohn realized that the risk
of inventory misstatement is high, he designed a computerized accounting system
for the prepaid inventory in 1992.
 Even with the Greenberg brothers’ refusal to cooperate, Cohn was persistent to
collect the information need for the system. After weeks of his futile effort, he
gave up.
 Fred Greenberg had reason not to cooperate with Cohn. Since the mid-1980s, he
has been intentionally overstating the company’s prepaid inventory resulting to
overstatement of cost of goods sold and net income each year. He reasoned that
since his father fell ill, he didn’t want him to worry about hiss business. During the
late 1980s and early 1990s, the Greenberg brothers had a difficulty competing
with large wholesalers in the market. To overstate inventory, Fred destroys the
delivery receipts forwarded to him by JGI’s warehouse manager and neglected to
update the prepaid inventory log for the given shipments. Weeks or even months
later, he would prepare new delivery receipts for those shipments, delete items in
the shipments from the prepaid inventory log, and then forward the receipts along
with the corresponding vendor invoices to Cohn.
 Grant Thornton served as JGI’s independent audit firm from 1986 through 1994.
Because prepaid inventory was JGI’s largest asset and because it posed significant
audit risks, the engagement audit team allocated a disproportionate amount of
audit resources to that item. The documents and other information needed are
requested by the audit engagement team to complete the audit.
 Each year, Cohn diligently collected the information requested by Grant Thornton
and give it to the accounting firm well before the date the audit was to begin, with
one exception. Because Fred Greenberg failed to give the prepaid inventory log,
delivery receipts, and other information he maintained for JGI’s prepaid inventory
to Cohn on a timely basis, Grant Thornton received that information well after the
audit begun each year.
 Because Fred had destroyed many of the delivery receipts prepared by the
warehouse manager, the Grant Thornton auditors failed to discover that much of
JGI’s year-end prepaid inventory was doubled-counted.” A critical issue in
subsequent litigation stemming from this case was whether Grant Thornton was
justified in relying on the delivery receipts to audit JGI’s year-end prepaid
inventory. Members of the audit engagement team maintained that because JGI’s
warehouse manager prepared the delivery receipts independently of the
 company’s accounting function for prepaid inventory, those documents provided
sufficient competent evidence to corroborate prepaid inventory.
 During the 1992 JGI audit, members of the Grant Thornton audit team told Steve
Cohn and Emmanuel Greenberg they were concerned by the large increase in
prepaid inventory over the previous three years. The auditors also expressed
concern regarding the haphazard accounting procedures applied to prepaid
inventory. These concerns the auditors to include the following comments in a
report entitled “Internal Control Structure Reportable Conditions and Advisory
Comments” that was submitted to Emmanuel Greenberg at the conclusion of the
1992 audit.
 The auditors had access to the notification forms JGI’s customs broker sent to Fred
Greenberg when a prepaid inventory shipments an abnormally long period of time
had lapsed between the date the customs broker inspected the merchandise and
the date that merchandise arrived at JGI’s warehouse.
 Near end of the 1993 audit, a Grant Thornton auditor stumbled across a large
stack of Form 9540-1 documents in the receiving office of JGI’s warehouse. They
attempted to match individual delivery receipts with the corresponding Form 9540-
1 documents to verify the dates or numerical order, the “task proved
insurmountable and was abandoned.” In explaining why the auditors did not insist
on JGI providing those forms in a usable condition, a Grant Thornton
representative noted that the 1993 audit program did not require the delivery
receipts to be matched with the Form 9540-1 documents.
 Throughout 1994, Fred Greenberg continued to refuse to adopt Grant Thornton’s
recommendations for improving the accounting for, and control over, prepaid
inventory. A Grant Thornton representative then met Fred and told him that, at a
minimum, JGI would have to provide the Form 9540-1 documents to Grant
Thornton if the accounting firm was to complete the audit. Still, Fred refused to
comply. Grant Thornton informed Emmanuel and Cohn that the dates were
falsified when Fred provided them the forms. Grant Thornton terminated the audit.
Fred admitted his fraudulent scheme to his brother. Following Fred’s confession,
JGI retained Grant Thornton to determine the impact of the fraudulent scheme on
the company’s prior financial statements and to develop a set of current financial
statements that were reliable. The Greenberg provided this information to their
company’s three banks. Within six months, JGI filed for bankruptcy and ceased
operations.
II. SWOT Analysis
 Strength
 The controller of the company was able to develop an internal reporting
system that produced monthly financial statements the Greenberg could
use to make timely and informed decisions for their business.
 Implementation of new policies and procedures that provide for
segregation of key responsibilities within the company’s transaction cycles.

 Weakness
 Did not place heavy emphasis on internal control
 Top management relied primarily upon their own intuition and the
competence and integrity of their key subordinates to manage and control
their company’s operations.
 Failed to modernized the company’s accounting and control procedures for
prepaid inventory.
 Due to their accounting procedures used, there was some risk that certain
inventory items would be “doubled-counted” at year-end that could lead to
misstatement of financial statement.
 Fred, in-charge for overseeing the prepaid inventory, intentionally
overstated the account for it and significant changes in the market cause
him to continue his fraudulent scheme.

 Opportunities
 The company may able to have computerized accounting and control
procedures for prepaid inventory.
 The company may develop an appropriate network of internal controls for
the growing company.

 Threats
 Difficult to compete with larger wholesalers that were encroaching on their
company’s market.
 The management was pressured to appear as profitable business.
III. Recommendations
 The management should solely relied with their own intuition and the competence
and the integrity of their subordinates to manage and control their company’s
operations because this could be an opportunity for them to commit employee’s
fraud. Sadly, in this case, the management was responsible in the fraudulent
scheme. Fred, as one of the top management executives, even he was pressured
to have the performance status of the company in order for him not to aggravate
his dying father and to compete with the larger wholesalers, he should not
overstated their physical inventories, in the first place, since this could compromise
the materiality of the financial statement of the company. This could lead to the
misrepresentation of the company to their operating results. Emmanuel, the
company’s president, should not let his brother, Fred, to do impractical ways as to
the accounting procedures being used. He should convince to follow the advice of
Cohn who already exert his expertise for the computerized accounting system of
the company.

 As to the viewpoint of the Grant Thornton, I think their audit procedure being used
is inadequate since they did not exert much effort to match individual delivery
receipts with the corresponding Form 9540-1 to verify the dates reported on the
delivery receipts. They just settled to their rationalization that the audit program
did not require the delivery receipts to be matched with the Form 9540-1. They
should take another accounting procedure to discover the reason behind of the
huge balance of prepaid inventory, in order for them to prove whether there is
really a fraudulent scheme. Also, an audit firm does not have a responsibility to
“insist” that the client management correct internal control deficiencies. However,
the failure of the client executives to do so reflects poorly on their overall control
consciousness, if not integrity. Similar to what happened to this case, an audit firm
may have to consider resigning from the engagement if client management refuses
to address significant internal control problems.