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. 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 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 team member 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 about accommodating

hardship situations?

Short answer

(1) Implement effective internal controls.

(2) This case would not affect the company’s balance sheet, but will affect income statement.

(3) Different discretion for different type of companies.

Step-by-step solution

Definition of internal controls

Internal controls are the controls that manage companies’ internal controls.

To prevent fraud

To remove this type of fraud, the company’s internal controls must be strong. The policies of the company are also strict. The strict internal control helps the company in preventing fraud.

Effect on the balance sheet and income statement

This case will not affect the company's balance sheet, but it affects the company's income statement, as net income will be overstated due to the lesser amount of the bad debts.

Accommodating hardship situation

In these types of situations, every company has different opinions. Generally, the small business has to know their loyal customers and deal with the excellent manner. Still, the large companies do not know about their customers, as they are not personally connected with them.