Mel O\'Conner owns rental properties in Michigan. Each property has a manager wh
ID: 2445045 • Letter: M
Question
Mel O'Conner owns rental properties in Michigan. Each property has a manager who collects rent, arranges for repairs, and runs advertisements in local newspapers. The property managers transfer cash to O'Conner monthly and prepare their own bank reconciliations. The manager in Lansing has been stealing from the company. To cover the theft, he understates the amount of the outstanding checks on the monthly bank reconciliation. As a result, each monthly bank reconciliation appears to balance. However, the balance sheet reports more cash than O'Conner actually has in the bank. In negotiating the sale of the Lansing property, O'Conner is showing the balance sheet to prospective investors.
Identify two parties other than O'Conner who can be harmed by this theft. In what ways can they be harmed? Discuss the role accounting plays in this situation. What internal controls could be put in place to prevent this type of theft?
Please provide detailed responses to the questions above.
Explanation / Answer
Answer:
Two other party who can be harmed by this theft : Propective buyer, Tenant and Banker/financer
What ways they can harmed ? :: Because the balance sheet understates cash, a potential buyer may value the building based on the amounts showing on the balance sheet. If the buyer keeps the same manager, he will not have the cash flow he expects. The second party at risk is the lender. If a bank lends based on a fraudulent balance sheet, the bank may lose if the buyer does not continue to make payments
Role of Account and Internal Control:
Mel O'Connor, is the main part harmed by this theft, first for placing his confidence in this manager and allowing the same person to collect rent and other cash duties and do bank reconciliations, and second by the erroneous granting he has on his company real profits. Put Internal control system to appoint other person to do bank reconcilition and accounting work, who verify payment receipt and bank..
The manager when the theft is discovered will be losing his job and ending in jail, and might be paying money back; the accountant in charge of Mr. O’Connors company by losing the job and even the license due to the incompetence in discovering the theft or because he/she agreed with it; as well the tenants may also believe that they had paid the rent while the manager has stolen the money for what they can be evicted from housing while they lost their money.
Accounting plays a big role in all companies, small or big; in this situation the accountant should be able to find the erroneous balances when doing bank reconciliations and getting together balance sheets for the company. and must have strong internal control over the operation of the company to prevent theft.
It should be able to track down all the way to the manager who was stealing and report to his client, O’Connor.