Question

Dylan worked for a propane gas distributor as an accounting clerk in a small Midwestern town. Last winter, his brother Mike lost his job at the machine plant. In January, temperatures were sub-zero, and Mike had run out of money. Dylan saw that Mike's account was overdue, and he knew Mike needed another delivery to heat his home. He decided to credit Mike's account and debit the balance to the parts inventory because he knew the parts manager, the owner's son, was incompetent and would never notice the extra entry. Months went by, and Dylan repeated the process until an auditor ran across the charges by chance. When the owner fired Dylan, he said, "If you had only come to me and told me about Mike's situation, we could have worked something out."

Requirements:

1. What can a business like this do to prevent employee fraud of this kind?

2. What effect would Dylan's actions have on the balance sheet? The income statement?

3. How much discretion does a business have with regard to accommodating hardship situations?

Answer 1

1. A business in a situation like this should identify the missing internal control characteristics in each situation.

In this case, the fraud done by dylan, could have been detected by the manager, if he reviewed the entry. The business should have adopted the system of physical inventory taking periodically to find out the difference between the book balance and the physical of the parts inventory. All the employees should be competent, and well trained to act ethically. Internal control system should also be followed strictly.

2. In this case inventory would be highly stated as those fraudulent entries were passed and account receivables would be understated as business is losing inventory but not gaining any account receivables in return and there will be no cash transaction . The overall effect will be nil on balance sheet. In income statement due to lesser amount of bad debt it would be overstated.

3. I think that every company acts differently, it depends on the vision and values a business has. Typically small business know about their loyal costumers, andsituation like this one they help they costumers when they are in need, and in companies they cannot meet each and every customers so they do not worry about welfare that much