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

Identify who, other than O’Conner, could be harmed by this theft. In what ways could they be harmed?

Discuss the role accounting plays in this situation.

Answer 1

Mel O’Conner operate Rental Properties in Michigan . Each property manage by Manager who collect rent , arrange for repairs an run day to day activity ,advertisement etc.

The property manager maintain their Own bank Reconciliation statement and submit the same to Mel O Conner on a monthly basis along with cash.

Problem happened with One of the Manager Lansing , has started stealing from the company . Obviously he started doing fraud . This theft matter he wants to manage . So he started overstated the amount of the Outstanding in the Month Bank reconciliation Statement.

In this case Mel O Conner has to review Bank reconciliation statement with Bank Balance but he might be missed the same and dependent on Manager . Mel missed to do reconciliation and review of individual Bank reconciliation submitted ny respective manager .

Due to above miss , gradually balanced accommodated and one time Cash Balance in the Balance Sheet shown more than cash actually available in the Bank . So mismatched happened .

Mel O Conner now planning to Sale his Business , while selling his business , Investor, Nuyer who will be interest to buy and Invest in this business they will review balance Sheet and Noticed that Bank Balance is quite high in Bank which is not correct . Normally during purchase time , Buyer not do reconciliation of casn ( physical cash) and Book balance etc so , they generally dependent on Financial Number

In this scenario , other than O’Conner , Investor , Buyer will be harmed because financial number is not correct and statement is overstated cash balance so distorted cash balance and Financial .Company does not have enough cash as disclosed in the financial . So Might be O ‘conner will face legal issue in this case . He manipulate number and not done due diligence of all financial number in the statement mainly relates to Bank Reconciliation , Physical cash balance , closing balance as per Bank Reconciliation not tallied with closing balance of Bank Statement etc.