Question

Bud Owens is the manager of a medium-size company. A few years ago, Bud 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. What effect does lowering the estimate for doubtful accounts have on the income statement and balance sheet? What type of internal controls might be useful for this company in overseeing the manager's recommendations for accounting changes? Share your thoughts as to whether you believe Bud's recommendation to adjust the allowance for doubtful accounts is within his right as manager or do you believe this action is an ethics violation (justify your response).

PLEASE ANSWER IN 10 FULL SENTENCES, I will give you a thumbs up if you do so :D

Answer 1

Effect of lowering the estimate for doubtful accounts have on the income statement and Balance sheet

Lowering the estimate for doubtful accounts makes the profit larger by reducing bad debt expense and makes the balance sheet look better by overstating Assets since the contra-asset allowance for doubtful Accounts would be understated.

type of internal controls might be useful for this company in overseeing the manager's recommendations for accounting changes

Company owners should setup control procedures to safeguard the company's assets and to ensure that the accounting records may be relied on. Some of these control procedures are: Authorization, recording transactions, documents and records, limited access, periodic independent verification of duties, and sound personnel procedures.

In this situation we have here, the ones that may help to keep this manager from influencing his bonus include limited access, periodic independent verification, seperation of duties, and sound personnel procedures.

Access to accounting records should be controlled so that someone other than this manager and the accountant can review and make decisions as to what type of entries to make. In other words, have someone else in addition to the manager and the accountant authorize adjusting entries.

If this company would have an independent accountant come in review the accounting records periodically, this manager and the company accountant would probably not be able to reduce the estimate of doubtful accounts without it being caught by that independent accountant.

The company's organizational plan should seperate functional responsiblities. This manager (Bud Owens) should not be allowed to make the accountant make any kind of adjusting entries that are not proper or not make necessary and correct adjusting entries.

Sound personnel procedures should include having this manager bonded. This manager's activities should be properly supervised higher up in the chain of command in the company's knowing that this manager's bonus depends on the profit of the business.

I think this actin is not within the rights of manager and is an ethics violation. No manager should be able to maneuver anything within the accounting function. A manager should manage the business, not the accounting for that business.