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Rental Property Internal Controls: Mel O'Conner

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?

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Solution Preview

We have investors looking at the property and Mel is showing the potential investors the balance sheet. We therefore know that the potential investors can be harmed, as they are being fraudulently misled even though Mel is not aware that fraud is taking place. The potential investors are also likely showing the balance sheet to their banks or financial institutions in an application for credit to purchase the rental properties. The banks and financial institutions are spending their time and resources analyzing the ...

Solution Summary

This solution discusses the case of Mel O'Conner and his rental properties. The parties that sustain harm, the accounting principles, and internal controls are discussed in this solution.