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 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 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?

Please write one paragraph for each question. "Thank You"

Answer 1

1. Lowering the estimate for doubtful account reduces the burden on Expenditure side of Income and Expenditure Statement. If expenditure is reduced, Net income is automatically increased, which in turn increases the base of income to be used for calculation of bonus.

Balance sheet is also affected with this change. Accounting Receivable are presented in Balance sheet at net of provision made for doubtful debtors.

1. Blair’s recommendation is not ethical. In case provisions are understated in Balance sheet, it will distort the true and fair view of financial standing of the firm. Same will come under the purview of Financial Audit as well if the amount is material enough.

1. Internal control: Every type of Provision created should have the reasonable back up. An Organization may create provisions for Provision for doubtful receivables outstanding liabilities or employee gratuity expenses or even bonus; all should be backed with substantial evidences/calculation/documents. For Unusual or month/year close entry like this, An additional internal control involving segregation of duties in respect of accounting entries posting authority and Maker-Checker control (Accounting entries being approved at multiple levels) should be applied so that One cannot influence any expense or income item in respect of finance function.