Ethical Issue (Internal Control and Cash): John Sullivan
John Sullivan owns apartment buildings in Nova Scotia and New Brunswick. Each property has a manager who collects rent, arranges for repairs, and runs advertisements in the local newspaper. The property managers transfer cash to Sullivan monthly and prepare their own bank reconciliations.
The manager in New Brunswick has been stealing large sums of money. To cover the theft, she understates the amount of amount of outstanding cheques on the monthly bank reconciliation. As a result, each monthly bank reconciliation 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.
Required:
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.