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Background
Many of Tarheel Textiles' old Draper looms have recently been replaced with more modern and efficient
weaving machines. Instead of being junked or scrapped, these surplus looms are sent by the plants to the supply
support division where they are stripped of all useable parts. These parts are reconditioned, stored, and placed
on perpetual inventory records as used supply items.
Manufacturing facilities within Tarheel route all of their purchase orders for Draper loom parts through the supply
support division. This includes orders made out to Draper Company and all other vendors from whom Draper parts
can be purchased. Supply support reviews its inventory records (and will hold the order for no more than one day)
to determine the availability of used parts generated from the loom stripping program. If parts are available within
Tarheel, the purchase order to the vendor is altered and the supply support division ships the available parts
automatically to the ordering plant. The altered purchase order is then sent to the vendor.
This program has resulted in substantial savings to Tarheel. Also, many of these older parts are in short supply and
are, therefore, difficult to obtain within a reasonable delivery time.
Operation
The loom reclamation program operates as follows:
Receiving:
1. Plant sends to the supply support division all surplus Draper looms. These looms may or may not be
operative, but would have been scrapped at the plant, or otherwise disposed of, had they not been
shipped to supply support.
2. Plant prepares a shipping document, which accompanies each shipment of looms. This shipping
document lists each asset shipped, identified with the Tarheel fixed asset tag number.
3. The shipping plant prepares the necessary reports to transfer these surplus items to the supply support
division fixed assets ledger.
4. The looms are transferred, unloaded, and placed in a 3-1/2 acre fenced-in field.
5. Shipping documents are sent to the administrative office, where looms listed on the shipping document
are compared to the quarterly printout received from corporate accounting which lists all assets
transferred to supply support during the quarter.
6. The administrative area keeps a manual listing of looms. This list is reconciled quarterly with the
computer-generated fixed asset ledger received from corporate accounting.
Loom Teardowns:
1. Looms are torn down daily (as many as time permits). The teardown process includes:
- Removing the Tarheel Textile asset tag number.
- Stripping the asset of all useable parts.
- Reconditioning these parts.
- Storing any salvageable metal and the residue (or carcass) in a central area. The residue is usually
loom frame and some useable pieces of metal.
2. A loom teardown report is prepared weekly. The report lists by identification tag number each loom torn
down during the week. Sometimes, however, tag numbers are missing from the looms--many of the
looms are old and thus the tags have been jarred loose or have fallen off during shipment.
3. This report is sent to the administrative office where it is used to authorize removal of these looms from
the fixed assets accounting records. The tag number identifies assets on the ledger.
4. The loom parts salvaged as a result of the loom teardown are collected. A quality control person reviews
each part to determine whether it is reusable as is, needs to be reconditioned, or should be sold as scrap
metal. The reusable parts are eventually sent to the supply room and placed on perpetual inventory
records for accountability.
A corporate security investigator visited the supply support complex. The security survey disclosed that:
a. The entire area was fenced, and the fences were in good repair.
b. The main entrance gate and the gate to the field of looms could be locked.
c. The field of looms was located approximately 400 feet from the main gate. Surplus electric motors had also
been placed in this field.
d. Administrative/accounting offices were located directly across from the loom field.
e. No safety or fire hazards existed.
f. No security persons, guards, or watchmen were used at the site.
g. The main gate opens onto a relatively busy intersection.
A review of the supply support division personnel records revealed that only one person had been involuntarily
terminated since the inception of the loom reclamation program. The security investigator contacted this
individual and reported he firmly believed that this person did not place the telephone call to Mr. Thomas. In
addition, in order to facilitate his understanding of the situation, the investigator obtained the organization chart.
The Loom Teardown Crew
While at the location, the corporate security investigator interviewed some of the members of the loom
teardown crew. Leon Curtis, a crewmember, spoke first. Leon, now a part-time employee, is a retired loom
mechanic from a nearby Tarheel plant and has been employed by Tarheel for 35 years.
"Every day Shaw (loom teardown supervisor) had us looking all over the field for 64" X-3 Draper looms. And
that's no easy job either, especially when the looms are stacked on top of each other, so close together and 8 or 9
in every row. He wouldn't tell us why and wouldn't ever take `no' for an answer. None of us knew of any
customer order for those looms. We would load the looms onto a truck with other items Johnstone wanted loom residues, scrap parts, and sometimes even reconditioned parts. Johnstone kept a truck in the loom
teardown area between pick-ups. We loaded scrap metal onto his truck each day. A fellow from Johnstone &
Company would come by, usually every Friday. He would look over the parts on the lot for anything else he
wanted to buy and would exchange trucks."
A second crewmember, Harvey Jolly, appeared somewhat ill at ease. He was a lanky fellow with thinning hair,
about 45 years of age. He was constantly smoking a cigarette.
Harvey said, "I've thought something crooked was up for quite a while, ever since Bob Johnstone started
coming over here occasionally instead of the usual guy. A couple of times Shaw and Johnstone would leave for
lunch in Shaw's Corvette, and they wouldn't come back until 3:00 p.m. No, you can't tell me something wasn't
happening."
Danny Burton, a young crewmember about 19 years old, interjected, "We aren't the only ones who knew
something wasn't right. Ask Clark Danley (a supply support division engineer). He can tell you a lot more than
we can. Anyway, I've always wondered why Tarheel Textiles would even think about hiring somebody with a
criminal record."
Harvey Jolly spoke again. "It's difficult keeping up with all these parts, especially when you tear down as many
as 12 or 14 looms a week. Take the brass, for instance. We put all the brass pieces in separate baskets, and entire
baskets will sometimes disappear during weekends. We try to keep track of all the parts, especially after we
steam clean, repair, and repaint them. But with so many parts, it's really hard."
Leon Curtis said, "We're really glad to be able to talk to you about this. We've been talking about it among
ourselves but didn't know whom to turn to. It just isn't right for us to work hard and try to do the best we can at
our jobs, when somebody else is doing just the opposite."
The security investigator thanked each crewmember for his cooperation and urged them to contact him if they
thought of anything further.
Alan Shaw
The security investigator and supply support manager interviewed Alan Shaw, the supervisor of the loom
teardown program. Mr. Shaw is 36 years old and married. He and his wife are expecting their second child
shortly. Shaw is a very outgoing and congenial person and makes friends easily. Many have said Shaw is a
"natural" manager and works well with people. Past performance evaluations have indicated that his only
shortcomings are his impatience and quick temper.
When confronted with the charges, Mr. Shaw denied any wrongdoing and demanded proof of the allegations.
Shaw said, "I've always followed established procedures and tried to do things properly. But you just can't
watch everybody all of the time, and I trust my employees to do the right thing. I've never had any trouble in the
three years I've worked with Tarheel Textiles or with anybody I've ever worked for. I'm a hard worker. You
know I've worked a lot of overtime hours in order to get the job done. I even had to request gate keys so I could
work at night in order to keep up with my workload. I would be foolish to do anything to jeopardize my career
with Tarheel, especially since my family and I have just moved into a new house."
Two days later, Mr. Shaw requested a meeting with the supply support manager. Shaw stated that this situation
had cast suspicion upon him, that his employees could never have confidence in him again, and that he wasn't
sure he wanted to work for a company that would accuse him of such things. Alan Shaw asked to be suspended
of all job responsibilities, pending the result of the investigation.
The supply support manager was disappointed; he thought Mr. Shaw had always performed well, had a lot of
potential, and was a "diamond in the rough." But he had no alternative but to suspend Mr. Shaw.
The Johnstone & Company Visit
Mr. Arthur Thomas, corporate buyer, and a corporate security investigator visited Johnstone & Company for
the purpose of interviewing key employees who might provide pertinent information. Johnstone & Company
was the customer to whom the majority of loom residues and surplus loom parts were sold. The company deals
primarily with the sale of scrap and junk metal, but also markets converted looms and other textile machinery.
Because of their long-standing business relationship, Arthur Thomas asked to speak privately with Mr. Gordon
Johnstone, president of Johnstone & Company, before the security investigator questioned him. After a 45minute discussion, the security investigator joined them.
Mr. Johnstone vehemently denied knowledge of any wrongdoing. He stated he had not given any financial
inducement to Tarheel employees for shipping any completed looms or other parts.
He said, "Loom residues and scrap parts are brought onto my lot in a Johnstone & Company truck from Tarheel
Textiles. The items are unloaded and placed in the "junk field" with all other scrap metal. We don't check each
item received to an invoice from your company. We just don't have the time and don't consider it necessary. I
have been conducting business with Tarheel Textiles for over 10 years, and our methods and approaches have
never been questioned. Our ethics, I assure you, are above reproach."
The investigator asked to speak with Mr. Johnstone's son, who was associated with the business as a vice
president of sales. Mr. Johnstone replied, "Bob is not here at present; however, I see no reason for your talking
to him. No member of my family has ever been associated with any disreputable business transaction. My son
and I are both active members of local civic organizations. Your innuendos are not appreciated, and I don't think
we have anything else to discuss."
Mr. Thomas and the security investigator thanked Mr. Johnstone for his assistance. As they were leaving, the
investigator noticed that the Draper identification plates had been removed from some of the Tarheel loom
residues on the lot.
The Inventory
Corporate security reviewed its findings to date with the director of corporate purchasing and the supply support
manager. All concurred that a physical inventory of looms in the field needed to be taken. Written procedures
were developed and included the following:
a. The inventory would be taken by total count only, not by individual type/size loom. An exception was that
all 64" X-3 looms would be identified separately.
b. Each loom would be tagged when counted.
c. The total number of looms in each row was to be written on a separate tag and attached to the loom at the
end of each row.
d. All tags must be accounted for.
e. Instructions were to be discussed with all persons participating in the inventory-taking process prior to
starting.
Approximately 2,700 looms were counted, and 42 man-hours were needed to take the inventory. Reconciliation
of the overall physical count to quantities on inventory records disclosed a net shortage of 59 looms. (There was
a 72-unit shortage of looms that had not yet been stripped. A gain of 13 looms residues was disclosed.)
The variance relating to 64" X-3 looms was isolated: 34 looms on inventory records, five looms on hand in field,
29 loom shortage.
The Inventory Record Review
The administrative/accounting office also did some investigative work:
a. A reconciliation of loom residues invoiced since inception of the program (approximately 24 months) to
looms removed from the fixed asset ledger, taking into consideration residues currently on hand, revealed a
shortage of 38 looms.
b. Accounting personnel stated that the possibility of poor record keeping, especially in the first months of the
program, and inaccurate preparation of loom teardown reports could explain a portion of this variance.
c. Sixteen Tarheel Textile fixed asset identification tags were located in Mr. Shaw's desk drawer and toolbox.
These appeared to have been accumulated over a period of time. Accounting personnel traced these tag
numbers to the fixed asset ledger: all numbers were identified with 64" X-3 Draper looms.
d. No customer invoices for brass had been issued during the last 12 months.
e. No 64" X-3 Draper looms were listed on shipping documents which supported shipments made during the
last six months.
Other Pertinent Information
The average market value for these Draper looms is $750. Converted looms can sell for as much as $7,500. The
value of parts varies, but ranges from $2 to $70. Johnstone & Company has been paying Tarheel Textiles $75 to
$100 for each loom residue purchased.
a. Approximately two pounds of brass can be salvaged from each stripped loom. This brass can be sold to a
local dealer for 53 cents/pound.
b. The 64" X-3 Draper loom parts may be used in converting looms to air-jet looms, which are more efficient
and utilize newer technologies.
c. In recent months, Johnstone & Company has also been purchasing reconditioned loom parts in addition to
scrap metal.
d. Cathy Shaw, wife of the Draper area supervisor, works as a billing clerk in the supply support accounting
office.
e. Leventhal Parts & Supply Company also purchases a small percentage of loom residues and unusable parts,
but only offers Tarheel Textiles $50 per residue.