Question

You have recently been hired as the assistant controller for Stanton Industries, a large, publicly held manufacturing company. Your immediate superior is the controller who, in turn, is responsible to the vice president 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 of accounts receivable and have applied historical percentages to the balances of each of the age categories. The analysis indicates that an appropriate 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 aging 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.” What is the effect on income before taxes of the change requested by the controller? Consider your options and responsibilities along with the possible consequences of any action you might take. Discuss the ethical dilemma you face and what you would do. Do you agree with your classmates' intended actions?

Answer 1

Existing balance in the allowance account : $ 20,000 Cr.

Required balance in the allowance account : $ 180,000

Bad debt expense : $ 160,000.

If the required balance reduces to $ 135,000, bad debt expense would be $ 115,000.

Effect on income before taxes of the change requested by the controller = $ 160,000 - $ 115,000 = $ 45,000 increase.

The ethical dilemma is that of fudging the numbers and breaking the trust of the shareholders and the other stakeholders of the organization. Your boss wants to present numbers with a better bottomline so that his appraisal, bonus and promotions do not suffer.

You are an thical person, and you think that what is being suggested by your boss is blatantly unethical, and you do not want to be a party to it.

The first option for you is to find another job to get out of the situation. But that would not be in the larger interest of the organization or its stakeholders.

The other option is to consult a lawyer and file a complaint. But you need evidence to prove that your boss had indeed made the unethical suggestion. So the next time you go into his chamber, bring up the topic again, and get the conversation taped.