Audit and Fictitious Inventory Items

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Case 2.1 (Doughtie's Foods, Inc.)
In the late 1970s, William Nashwinter accepted a position as a salesman with Doughtie's Foods, Inc., a publicly owned food products company headquartered in Portsmouth, Virginia.1 The ambitious young salesman impressed his superiors with his hard work and dedication and was soon promoted to general manager of the Gravins Division of Doughtie's, a promotion that nearly doubled his salary. The Gravins Division was essentially a large warehouse that wholesaled frozen-food products to retail outlets on the East Coast. Nashwinter quickly discovered that managing a large wholesale operation was much more complicated and stressful than working a sales route. Within a short time after accepting the promotion, Nashwinter found himself being maligned by corporate headquarters for his division's poor performance. After several rounds of scathing criticism for failing to meet what he perceived to be unrealistic profit goals, Nashwinter decided to take matters into his own hands. The young manager began fabricating fictitious inventory on his monthly performance reports to headquarters. By inflating his monthly inventory balance, Nashwinter lowered his division's cost of goods sold and thus increased its gross profit. Several years later, Nashwinter insisted that he had never intended to continue his scheme indefinitely. Instead, he saw his actions simply as a solution to a short-term problem: "I always had in the back of my mind that the division would make enough legitimate profit one day to justify the fake numbers."2 Unfortunately for Nashwinter, his division's actual operating results continued to be disappointing. With each passing year, Nashwinter had to fabricate larger amounts of fictitious inventory to reach his profit goals. Finally, in 1982, Nashwinter admitted to a superior that he had been filing false inventory reports to corporate headquarters for several years. Doughtie's management immediately fired Nashwinter and retained...
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