Ethics case: The financial officer of Suit Ltd believes that the yearly allowance for impaired receivables...

Ethics case: The financial officer of Suit Ltd believes that the yearly allowance for impaired receivables for Shirt Ltd should be $185 000. The CEO of Suit Ltd, nervous that the shareholders might expect the business to sustain its 10% growth rate, suggests that the financial controller increase the allowance for impairment to $285 000. The CEO thinks that the lower profit, which reflects a 7% growth rate, will be a more sustainable rate for Suit Ltd.

Required

(a) Who are the stakeholders in this case?
(b) Does the CEO’s request pose an ethical dilemma for the controller?
(c) Should the financial controller be concerned with Suit Ltd’s growth rate in estimating the allowance? Explain your answer.

Solutions

Expert Solution

(a) Who are the stakeholders in this case?

Answer : The stakeholders in this situation are:

- The CEO of Suit Ltd.

- financial officer of Suit Ltd.

- The stockholders.

(b) Does the CEO’s request pose an ethical dilemma for the controller?

Answer : Yes. The controller is posed with an ethical dilemma-should he/she follow the CEO's “suggestion” and prepare misleading financial statements (understated net income) or should he/she attempt to stand up to and possibly anger the CEO by preparing a fair (realistic) income statement.

(c) Should the financial controller be concerned with Suit Ltd’s growth rate in estimating the allowance? Explain your answer.

Answer : Suit Ltd’s growth rate should be a product of fair and accurate financial statements, not vice versa. That is, one should not prepare financial statements with the objective of achieving or sustaining a predetermined growth rate. The growth rate should be a product of management and operating results, not of creative accounting.

ekkarill92 answered 1 year ago

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