Dylan worked for a propane gas distributor as an accounting clerk in a small tow

Question

Dylan worked for a propane gas distributor as an accounting clerk in a small town. Last winter, his brother, Mike, lost his job at the machine plant. By 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 part 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."

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

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

c) How much discretion does a business have with regard to accommodating hardship situations?

Explanation / Answer

1. Dylan’s journal entries should be reviewed by a manager. Employees should not be able to access family accounts. Regular inventory should be taken of the parts, which would have indicated a difference in the account. The company should make sure that all its employees are competent, adequately trained, and able to spot irregularities.The business lacked internal controls. If they improved their internal controls fraud couldn't had happened.

2.The parts inventory is overstated by the amount of the past due account. However, Accounts Receivable is understated by the same amount. The net effect of the two misstatements is zero. If the company uses the percent-of-receivables or aging approach to estimate bad debts, then Bad Debts Expense and the Allowance for Bad Debts are probably both understated. If this is the case, then net Accounts Receivable are also overstated.

3.Small business owners have full discretion to make exceptions to normal procedures as they see fit. These cases often amount to a tradeoff where the owners are willing to take lower profits in order to help their customers. Larger scale companies must have more rigid policies and controls, and would have far fewer discretionary powers.

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.