John Sullivan owns appartments buildings in Nova Scotia, New Brunswick, and Quebec. Each property has a manager who collects rent, arranges for reparis, and runs advertisements in the local newpaper. the property managers transfer cash to Sullivan monthly and prepare their own ban reconciliations.
The manager in New brunswick has been stealing large sums of money. To cover the theft, she understates the amount of outstanding cheques on the monthly bank reconcilation. As a result, each monthly bank appears to balance. However, the balance sheet reports more cash than Sullivan actually has in the bank. In negotiating the sale of the New Brunswick property, Sullivan is showing the balance sheet to prospective investors.
Questions
1) Identify two parties other than Sullivan who can be harmed by this theft. in what ways can they be harmed?
2) Discuss the role accounting plays in this situation.
1) Two parties other than John Sullivan who can be harmed by this theft are the prospective investors and the property tenants.
- Prospective investors can be harmed because they may rely on the balance sheet to make their investment decisions. If they see a higher amount of cash on the balance sheet, they may perceive the property as having better financial stability, potentially leading them to invest more money or accept a higher purchase price. However, this perception will be misinformed as the actual cash in the bank is less than what is reported. This can result in the investors overpaying for the property and suffering financial losses.
- The property tenants can also be harmed because the stolen money could have been used for necessary repairs and maintenance. If the property does not receive adequate funds for upkeep, the quality of living for the tenants may decline. Additionally, if the stolen money had been intended for improvements or amenities, tenants will miss out on these enhancements that were initially planned.
2) Accounting plays a crucial role in this situation as it involves financial reporting and analysis. Here are some key aspects of accounting in this scenario:
- Bank Reconciliation: The property managers are responsible for preparing their own bank reconciliations, which involve comparing the bank statement to the company's records. However, in this case, the manager in New Brunswick is dishonestly understating the amount of outstanding cheques, resulting in inaccurate reconciliation. Accounting could help uncover such discrepancies by regularly verifying and cross-checking the reconciliations to catch any inconsistencies.
- Balance Sheet: The balance sheet reports the financial position of a company at a specific point in time, including its assets, liabilities, and equity. In this situation, the balance sheet is being used by John Sullivan to present a more favorable financial position to prospective investors. However, due to the fraudulent activities, the reported cash amount is higher than what is actually available. Accounting principles and regulations ensure the accuracy of financial statements, including the balance sheet, to provide reliable information to stakeholders.
- Internal Controls: Accounting plays a critical role in establishing and monitoring internal controls to prevent or detect fraudulent activities. In this case, a lack of effective internal controls allowed the manager in New Brunswick to carry out the theft unnoticed for a significant period. Proper accounting practices should include systems and procedures designed to safeguard company assets, such as segregation of duties, regular audits, and thorough oversight.
- Transparency and Trust: Accounting principles and ethical standards are essential for maintaining transparency and trust in financial matters. The fraudulent actions of the property manager undermine these principles, breaching the trust of both John Sullivan and potential investors. Proper accounting practices create a foundation of trust and credibility, providing accurate information for decision-making and fostering confidence in the financial statements.