CASE 2.1
JACK GREENBERG, INC.
Synopsis
In the mid-1980s, Emanuel and Fred Greenberg each inherited a 50 percent ownership
interest in a successful wholesale business established and operated for decades by their father.
Philadelphia-based Jack Greenberg, Inc., (JGI) sold food products, principally meat and cheese, to
restaurants and other wholesale customers up and down the eastern seaboard. The company’s largest
In 1986, the Greenberg brothers hired Steve Cohn, a former Coopers & Lybrand employee,
to modernize their company’s archaic accounting system. Cohn successfully updated each segment
of JGI’s accounting system with the exception of the module involving prepaid inventory. Despite
repeated attempts by Cohn to convince Fred Greenberg to “computerize” the prepaid inventory
accounting module, Fred resisted. In fact, Fred had reason to resist since he had been manipulating
JGI’s periodic operating results for several years by overstating its prepaid inventory.
From 1986 through 1994, Grant Thornton audited JGI’s annual financial statements, which
Case 2.1 Jack Greenberg, Inc. 97
1. Emanuel and Fred Greenberg became equal partners in Jack Greenberg, Inc., (JGI) following
their father’s death; Emanuel became the company’s president, while Fred assumed the title of vice-
president.
3. Similar to many family-owned businesses, JGI had historically not placed a heavy emphasis on
internal control issues.
5. Cohn implemented a wide range of improvements in JGI’s accounting and control systems;
6. Since before his father’s death, Fred Greenberg had been responsible for all purchasing,
accounting, control, and business decisions involving the company’s prepaid inventory.
8. Fred refused to cooperate with Cohn because he had been manipulating JGI’s operating results
for years by systematically overstating the large Prepaid Inventory account.
10. Grant Thornton was ultimately sued by JGI’s bankruptcy trustee; the trustee alleged that the
accounting firm had made critical mistakes in its annual audits of JGI, including relying almost
98 Case 2.1 Jack Greenberg, Inc.
1. To introduce students to the key audit objectives for inventory.
3. To examine the competence of audit evidence yielded by internally-prepared versus externally-
prepared client documents.
Suggestions for Use
One of my most important objectives in teaching an auditing course, particularly an introductory
auditing course, is to convey to students the critical importance of auditors maintaining a healthy
degree of skepticism on every engagement. That trait or attribute should prompt auditors to
thoroughly investigate and document suspicious circumstances that they encounter during an audit.
In this case, the auditors were faced with a situation in which a client executive stubbornly refused to
Suggested Solutions to Case Questions
1. The phrase “audit risk” refers to the likelihood that an auditor “may unknowingly fail to
appropriately qualify his or her opinion on financial statements that are materially misstated” [AU
312.02]. “Inherent risk,” “control risk,” and “detection” risk are the three individual components of
audit risk. Following are brief descriptions of these components that were taken from AU 312
(paragraphs 21 and 24):
►Inherent risk: the susceptibility of a relevant assertion to a misstatement that could be material,
Case 2.1 Jack Greenberg, Inc. 99
misstatements.
Listed next are some examples of audit risk factors that are not unique to family-owned
businesses but likely common to them.
Inherent risk:
►I would suggest that family-owned businesses may be more inclined to petty infighting and
other interpersonal “issues” than businesses overseen by professional management teams. Such
Control risk:
►The potential for “petty infighting” and other interpersonal problems within family-owned
businesses may result in their internal control policies and procedures being intentionally
subverted by malcontents.
Detection risk:
►The relatively small size of many family-owned businesses likely requires them to bargain
with their auditors to obtain an annual audit at the lowest cost possible. Such bargaining may
How should auditors address these risk factors? Generally, by varying the nature, extent, and
timing of their audit tests. For example, if a client does not have sufficient segregation of key duties,
then the audit team will have to take this factor into consideration in planning the annual audit. In
the latter circumstance, one strategy would be to complete a “balance sheet” audit that places little
100 Case 2.1 Jack Greenberg, Inc.
2. The primary audit objectives for a client’s inventory are typically corroborating the “existence”
and “valuation” assertions (related to account balances). For the Prepaid Inventory account, Grant
Thornton’s primary audit objective likely centered on the existence assertion. That is, did the several
million dollars of inventory included in the year-balance of that account actually exist? Inextricably
3. The controversial issue in this context is whether Grant Thornton was justified in relying on the
delivery receipts given the “segregation of duties” that existed between JGI’s receiving function and
accounting function for prepaid inventory. In one sense, Grant Thornton was correct in maintaining
that there was “segregation of duties” between the preparation of the delivery receipts and the
subsequent accounting treatment applied to those receipts. The warehouse manager prepared the
delivery receipts independently of Fred Greenberg, who then processed the delivery receipts for
accounting purposes. However, was this segregation of duties sufficient or “adequate”? In fact,
4. The phrase “walk–through audit test” refers to the selection of a small number of client
transactions and then tracking those transactions through the standard steps or procedures that the
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client uses in processing such transactions. The primary purpose of these tests is to gain a better
understanding of a client’s accounting and control system for specific types of transactions.
5. As a point of information, I have found that students typically enjoy this type of exercise,
namely, identifying audit procedures that might have resulted in the discovery of a fraudulent
scheme. In fact, what students enjoy the most in this context is “shooting holes” in suggestions
made by their colleagues. “That wouldn’t have worked because . . .,” “That would have been too
costly,” or “How could you expect them to think of that?” are the types of statements that are often
prompted when students begin debating their choices. Of course, such debates can provide students
with important insights that they would not have obtained otherwise.
►During the interim tests of controls each year, the auditors could have collected copies of a sample
of delivery receipts. Then, the auditors could have traced these delivery receipts into the prepaid
►Similar to the prior suggestion, the auditors could have obtained copies of the freight documents
(bills of lading, etc.) for a sample of prepaid inventory shipments. Then, the auditors could have
tracked the given shipments into the prepaid inventory records to determine whether those shipments
had been transferred on a timely basis from the Prepaid Inventory account to the Merchandise
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►In retrospect, it seems that extensive analytical tests of JGI’s financial data might have revealed
6. An audit firm (of either an SEC registrant or another type of entity) does not have a
responsibility to “insist” that client management correct internal control deficiencies. However, the
failure of client executives to do so reflects poorly on their overall control consciousness, if not
integrity. Similar to what happened in this case, an audit firm may have to consider resigning from