Question

Tina Rodgers is the manager of a medium-size company. A few years ago, Tina Rodgers persuaded the owner to base a part of her compensation on the net income the company earns each year. Each December she estimates year-end financial figures in anticipation of the bonus she will receive. If the bonus is not as high as she would like, she offers several recommendations to the accountant for year-end adjustments. One of her favorite recommendations is for the controller to reduce the estimate of doubtful accounts.

Required

1. What effect does lowering the estimate for doubtful accounts have on the income statement and balance sheet?
2. Do you believe Rodger's recommendation to adjust the allowance for doubtful accounts is within her right as manager, or do you believe this action is an ethics violation? Justify your response.
3. What type of internal control(s) might be useful for this company in overseeing the manager's recommendations for accounting changes?

Answer 1

i) Lowering the estimate for doubtful accounts will increase the income of the company resulting in higher compensation for the manager.

ii) Well that depends on her role and seniority. With proper experience , she could be in a position to recommend such changes. Since, Tina Rodgers persuaded the owner for changing the computation of her compensation, its safe to say there is no ethics violation here and she can recommend such adjustment as she holds a high and senior position.

iii) All changes/recommendations/adjustments like these should be further checked and supervised by a senior. Since it has not been done, there is a visible lack of internal control policies in the company. Policies such as these might help -

i) Appointing and Internal Auditor

ii) Supervision of tasks - Maker Checker Concept

iii) Motivating employees to go on leaves

iv) Reporting of major changes made to the accounts

v) Checking of Remuneration/Compensation paid to management and checking whether they seem excess

vi) No one person should be handed a responsibility which does not leave any audit trail.

vii) Employee review programmes

viii) Finding out who gains from window dressing the most

ix) Investigation

x) Analysing Internal Control weakness letters from Internal and Statutory Auditor

xi) Asking auditors to mandatorily comment on Internal Control policies