Partners Owens and Wilson have a coin-operated laundry business in a retail shopping center. The business has operated for several years with the partners sharing income equally. They employ two part-time workers. The part-time employees work alternating shifts and are only there if either Owens or Wilson is present. The laundry business is primarily a cash business. On alternate days each partner empties the coins from the laundromats machines and deposits them in the bank. The business was generating a healthy cash flow for several years. However, in the last 18 months, cash flow declined precipitously. Wilson believes that the decline in cash is a result of collusion between the two part-time workers. Wilson assumes that the workers are somehow rigging the machines and requiring the customers to pay them directly. When Wilson shares these concerns with Owens, Owens assures Wilson that the part-time workers are not stealing money. Owens has been pocketing cash because she is experiencing personal financial problems relating to a messy divorce and several failed investments. She is urging Wilson to sell out and liquidate their partnership. She believes that upon liquidation she will have enough cash to overcome her personal financial crisis and repay the cash that she has taken from the business. Wilson is not aware of Owens financial problems.

Dr (Cr) Cash $43,000 Supplies and prepayments 1,800 Equipment 58,000 Accumulated depreciation -23,200 Accounts payable -2,350 Loan payableWilson -15,000 Sales -49,410 Operating expenses 18,700 Depreciation expense 5,800 CapitalOwens -10,500 CapitalWilson -26,840 Totals $0

In addition, the partnership has a contractual lease on the building where the laundromat is located. The lease expires five years from now. The monthly payments of $500 are consistently made on time and recorded as part of operating expense. If the lease is terminated early, the lessor requires a $2,000 payment for early lease termination. Required: 1. Identify the weakness in the partnerships internal control which could produce the pattern of declining cash flows. How could the partnership correct the internal control weakness? Explain. 2. Do you think an ethical breach has occurred? Explain.