In: Accounting
Instructor - Lead Question
Anton Blair is the manager of a medium-size company. A few years ago, Blair persuaded the owner to base a part of his compensation on the net income the company earns each year. Each December he estimates year-end financial figures in anticipation of the bonus he will receive. If the bonus is not as high as he would like, he offers several recommendations to the accountant for year-end adjustments. One of his favorite recommendations is for the accountant 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 Blair’s recommendation to adjust the allowance for doubtful accounts is within his rights 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?
ANSWERS: 1. Doubtful
accounts, or accounts where you think you will not get paid, are
subtracted from income, so lowering estimate of doubtful accounts
increases the company's reported net income.
2. Not within her rights as manager. As a manager she is supposed
to be an agent acting in the best interests of the owner of the
company. If the only reason she is suggesting accounting changes is
to increase her compensation, then she is putting her own interests
ahead of the company's/owner's interests. particularly since
adjusting the company's net income could affect company decision
making. if she has a good reason to lower doubtful account
estimates (for example if the controller traditionally overestimate
doubtful accounts, and she believes that this under-represents the
company's net income) then she has not committed an ethics
violation, but since the prompt clearly indicates that she makes
her recommendations based on a desire to increase her own
compensation, so she is no longer acting as a faithful agent for
the owner, then yes, her actions constitute and ethics
violation.
3. Anytime an accounting change affects the manager's compensation,
the manager should include a brief justification to be forwarded to
the owner, or the board of directors.