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 effect would Dylan's actions have on the balance sheet? The income statement? Assume the company uses the direct write-off method for past due accounts and Mike’s account meets the criteria for an uncollectible account.
2. What can a business like this do to prevent employee fraud of this kind?
3. How much discretion does a business have with regard to accommodating hardship situations?
4. Identify the IMA Ethical Standard that applies to this case and recommend internal control improvements to prevent this from happening in the future.