Establishing an Internal Audit Department: The Case of the Schwan Food Company

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Global Perspectives on Accounting Education Volume 5, 2008, 1-16

ESTABLISHING AN INTERNAL AUDIT DEPARTMENT: THE CASE OF THE SCHWAN FOOD COMPANY Hugh Pforsich College of Business Administration California State University - Sacramento Sacramento, California USA Bonita K. Peterson Kramer College of Business Montana State University Bozeman, Montana USA G. Randolph Just* ABSTRACT An effective internal audit department adds value to its organization in numerous ways. It helps the organization to achieve its objectives, improves risk management, strengthens internal controls, and enhances overall corporate governance. This case describes the steps that The Schwan Food Company took to establish its internal audit department, including finding a highly qualified chief audit executive, defining the internal audit department’s mission, developing the audit charter, staffing the department, creating an overall audit strategy, and assessing the department’s effectiveness. The exhibits provided in this case are used with permission straight from the company’s files, and all the information in this case is factual. The case is appropriate for an auditing class or an internal audit class at the senior or graduate level.

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G. Randolph Just, CMA, CPA, CIA, CFE, CISA, CFSA, CCSA, was vice president, Audit Services, at Allina Hospitals & Clinics in Minnetonka, Minnesota, USA when he died in January 2006. He was previously chief audit executive for The Schwan Food Company.

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Pforsich, Kramer, and Just

BACKGROUND he Schwan Food Company began in 1952 with one man and one truck. Marvin Schwan, the founder, was the son of German immigrants who came to the United States in 1920. He and his parents ran a creamery in Marshall, Minnesota, but were having trouble making ends meet. Marvin discovered that because of government pricing structures, he could sell ice cream for a few cents more in Yellow Medicine County, immediately north of Marshall. On March 18, 1952, he borrowed some dry ice bags and headed north in his used 1946 Dodge panel van with 14 gallons of ice cream. He knocked on farmhouse doors and sold all the ice cream. The next day he did the same thing again. Now, five decades later, The Schwan Food Company has gone from one man and one truck to 6,500 drivers in the Home Service business unit, and home delivery constitutes approximately 40 percent of the company’s total revenues. The pale yellow trucks that the delivery people drive are the most recognized components of The Schwan Food Company’s brand. Officially, the color is called “Inca Gold,” and it was supposedly the founder’s favorite color. “I think the legend is that he had a favorite tie with that color,” explains Mike Gunderson, manager of corporate communications for The Schwan Food Company. Examples of home delivery items are listed in Exhibit 1. In addition to home delivery, The Schwan Food Company’s primary business units have grown to include its Global Consumer Brands unit and its Food Services group. The Global Consumer Brands unit manufactures, markets, and delivers frozen foods to grocery, warehouse, club, and convenience stores across the country. The Food Services group manufactures, markets, and distributes value-added frozen food products to public and private schools, universities, healthcare facilities, convenience stores, and chain restaurants. Today, The Schwan Food

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EXHIBIT 1 Examples of The Schwan Food Company’s Home Delivery Items* Mini Deep Dish Cheese Pizza: 6 trays of 4 for $9.99 Oven Ready Breaded Shrimp: 1.5 pound bag for $12.99 Chicken Egg Rolls: 16 2-ounce portions for $11.99 Chicken and Broccoli Express Bowl: 2 12-ounce bowls for $7.49 Apple Cinnamon Flavored French Toast Sticks: Approx. 40 sticks for $6.79 *A complete list of home delivery items is available at www.schwans.com. Cheese and Herb Biscuits: 18 biscuits for $5.99 Stuffed Potatoes: 8 5-ounce portions for $8.99 Creamy, Rich Vanilla-Flavored Premium Ice Cream:...
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