Question

You have been recently hired as an assistant controller for XYZ Industries, a large, publically held manufacturing company. Your immediate supervisor is the controller who also reports directly to the VP of Finance. The controller has assigned you the task of preparing the year-end adjusting entries. In the receivables area, you have prepared an aging accounts receivable and have applied historical percentages to the balances of each of the age categories. The analysis indicates that an appropriate estimated balance for the allowance for uncollectible accounts is $180,000. The existing balance in the allowance account prior to any adjusting entry is a $20,000 credit balance. After showing your analysis to the controller, he tells you to change the aging category of a large account from over 120 days to current status and to prepare a new invoice to the customer with a revised date that agrees with the new category. This will change the required allowance for uncollectible accounts from $180,000 to $135,000. Tactfully, you ask the controller for an explanation for the change and he tells you “We need the extra income, the bottom line is too low.” Required: In a 2-3 page paper, discuss the following: Consider what you have learned relative to ethics and financial reporting. What is the rationale for the calculations/process used to estimate the $180,000 uncollectible allowance? How do you think the misstatement of funds will impact the income statement and balance sheet? What is the ethical dilemma you face? What are the ethical considerations? Consider your options and responsibilities as assistant controller. Identify the key internal and external stakeholders. What are the negative impacts that can happen if you do not follow the instructions of your supervisor? What are the potential consequences if you do comply with your supervisor’s instructions? Who will be negatively impacted?

Answer 1

Question on Ethical Dillema
a)	Learnings in ethics and financial reporting: Ethics basically refers to adhering to morally good practices, going beyond legal requirements. When we follow ethical practices, we try to keep our moral good going beyond what is legally required. Ethics is very important in every business aspect. When ethical practices are adhered to, confidence of each of the stakeholder goes up. Ethics is required in financial reporting framework as well. When financial reporting is done using ethical practices, it builds the confidence of users of financial statement and saves the company from using dubious practices to achieve its short term goals. Adhering to ethics always brings long run prosperity in business, when ethics in financial reporting are followed, it shows the true and more fair picture of company's performance.
b)	Rationale used to estimate uncollectible allowance $ 180000: Uncollectible allowance refers to an amount kept aside from profits to adjust future uncollecatability is accounts receivable. Generally, there is period in which an entity is able to collect it's credit sales proceeds from trade receivables commonly known as trade cycle. All trade receivables which are outstanding for more than the period of normal trade cycle, generally carry a higher risk of uncollectability. Therefore, there is a need to make an allowance for such uncollectability. The greater the period for which trade receivables are outstanding, the more the need to make an allowance. Hence if the average ageing of the trade receivables increases, allowance amount will go up.
c)	Misstatement of funds will impact the financial statement as follows: a) If the allowance amount is reduced from $ 180000 to $ 135000 it will increase net profits before tax by $ 45000, thereby increasing the distributable surplus., b) On the other hand it will show increased trade receivable balance to the extent of $ 45000 (When trade receivables are presented net off allowance account.)
d)	The dillema that I face: I, being assitant controller, am reponsible for reporting to controller. Controller has asked to issue fresh invoices to some old outstanding trade receivables, so as to make their ageing lower and thereby allowance amount lower. This is the instruction given by my immediate senior and therefore, I have to follow that. This instruction is clearly violation of financial ethical practice. Therefore, if I follow the instruction of my senior I will be non compliant on ethical front, if I do not follow the instruction of senior to comply with ethical requirement, I will be working against senior's instruction.
e)	Options and Responsibilities: As an assitant controller, I can discuss my concerns with my seniors, if the immediate senior i.e. supervisor is not agreeable to my viewpoint, I can take my concerns to even higher level. As an assistant controller, I am responsible for even higher control in financial reporting. The designation itself suggests that I need to bring more transparancy in financial reporting by following ethical practices.