Question

Mel O’Conner operates rental properties in Michigan. Each property has a manager who collects rent, arranges for repairs, and runs advertisements in the local newspaper. 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 overstates 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. O’Conner is currently putting his entire business up for sale. In negotiating the sale of the business, O’Conner is showing the balance sheet to prospective buyers.

Requirements

1. Identify who, other than O’Conner, could be harmed by this theft. In what ways could they be harmed?
2. Discuss the role accounting plays in this situation.

Answer 1

Answer 1) As Mr. Mel O’Conner is putting his entire business up for sale and for the same purpose, he is presenting hi balance sheet to prospective buyer. Due to fraud done by the manager in Lansing shows the overstated balance in the bank account in the balance sheet, it could harm the prospective buyer who buys the O’Conner business as it shows the more assets and will provide the better image of the business but in real the situation in not as it seems. This could cause problems in the valuation of the business and buyer will get the undervalue for the business, he is thinking of investing the money. Loss of reputation is also there. This can cause liquidity problem to the person buying Mr O’Conner business as there is mismatch in the actual cash figure and presented cash figure in the balance sheet.

Answer 2) Accounting plays a significant role in this situation. Financial statements should provide true and fair view of the financial information to the prospective buys as their decision making is widely dependent upon the information present in the financial statements. Such types of errors are committed by the employees and their effect is large. So in order to provide true and fair view of the business, bank reconciliation statement are prepared to find the mismatch between the bank pass book and cash book showing bank balance. These helps to understand the reason for the mismatch, which can be error done by mistake or fraud committed intentionally. The role of accounting in not only limited to preparation of the financial statements only but also to ensure that that the information disclosed provides the true and fair view of the business. Role of the accounting is also to ensure that if any mismatch of fund is there, it should be properly adjusted and its reason should be properly found in order to avoid further such transactions, so that the users of the financial information will have better scope of decision making and their trust in the financial disclosure should be retained to have long term relations.