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?
Identify two parties other than O'Conner who can be harmed by this theft. In what ways can they be 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.
Discuss the role accounting plays in this situation.
The reliance of investors on accounting information cannot be ...
The solution responds to each question by explaining the types of controls needed for offsite owners in order to avoid theft of rental income.