Read the following Ethical Issue 7-1 found at the end of chapter 7 of the text a

Question

Read the following Ethical Issue 7-1 found at the end of chapter 7 of the text and answer the questions.

Mel O'Connor owns 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 understates the monthly bank reconciliation appears to balance. 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.

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.

Explanation / Answer

Mel O'Connor, is harmed by this theft.

We can say that Mel O'Connor harmed by the theft, he had placed his confidence in the manager and allowed the manager to collect the cash as well as rent and other cash transactions and also prepare the bank reconciliation. This led to unethical activities by the manager. Apart from O’Connor the other parties who have been harmed by this act are the prospective buyers because they will assume all debts as a result of the manager’s theft unless they are able to see the misleading on the balance sheet of the company; the manager when the theft is discovered will be losing his job and ending in jail, and might be paying money back; the accountant in charge of Mr. O’Connors company by losing the job and even the license due to the incompetence in discovering the theft or because he/she agreed with it; as well the tenants may also believe that they had paid.

2. In a situation like this, accounting plays a major role in finidng out the errors in accounting caused by the fraudulents

Banks Reconciliation will play a critical role. O'Conner should be aware of Bank Reconciliaiton and shoudl get reason for each entry it has passed.

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