Module Five Assignment
Case 12-23.) Bad Bad Benny: A True Story (Identifying Controls for a System)
In the early twentieth century, there was an ambitious young man named Arthur who started working at a
company in Chicago as a mailroom clerk. He was a hard worker and very smart, eventually ending up as
the president of the company, the James H. Rhodes Company. The firm produced steel wool and
harvested sea sponges in Tarpon Spring, Florida for household and industrial use. The company was very
successful, and Arthur decided that the best way to assure the continued success of the company was to
hire trusted family members for key management positions – because you can always count on your
family. Arthur decided to hire his brother Benny to be his Chief Financial Officer (CFO), and placed
other members of the family in key management positions. He also started his eldest son, Arthur Junior
(an accountant by training) in a management training program, hoping that he would eventually succeed
him as president.
As the company moved into the 1920s, Benny was a model employee; he worked long hours,
never took vacations, and made sure that he personally managed all aspects of the cash function. For
example, he handled the entire purchasing process – from issuing purchase orders through the
disbursement of cash to pay bills. He also handled the cash side of the revenue process by collecting cash
payments, preparing the daily bank deposits, and reconciling the monthly bank statement.
The end of the 1920s saw the United States entering into its worst depression since the beginning
of the Industrial Age. Because of this, Arthur and other managers did not get raises, and in fact, took pay
cuts to keep the company going and avoid lay-offs. Arthur and other top management officials made
“lifestyle” adjustments as well – e.g., reducing the number of their household servants and keeping their
old cars, rather than purchasing new ones. Benny, however, was able to build a new house on the shore of
Lake Michigan and purchased a new car. He dressed impeccably and seemed impervious to the economic
downturn. His family continued to enjoy the theatre, new cars, and nice clothes.
Arthur’s wife became suspicious of Benny’s good fortune in the face of others’ hardships, so she
and Arthur hired an accountant to review the books. External audits were not yet required for publicly-
held companies, and the Securities and Exchange Commission (SEC) had not yet been formed (that
would happen in 1933-1934). Jim the account was eventually able to determine that Benny had diverted
company funds to himself by setting up false vendors and having checks mailed to himself. He also
diverted some of the cash payments received from customers and was able to hide it by handling the bank
deposits and the reconciliation of the company’s bank accounts. Eventually, Jim determined that Benny
had embezzled about $500,000 (in 1930 dollars).