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. Any sources used to support your answers below should be cited using APA Style.

• What effect does lowering the estimate for doubtful accounts have on the income statement and balance sheet?
• Do you believe Blair'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.
• What type of internal control(s) might be useful for this company in overseeing the manager's recommendations for accounting changes?

Answer 1

2. Obviously this action is a violation of ethics. Estimation of Doubtful Accounts are based on accounting standards and philosophies. According to the Matching concept of accounting , all corresponding expenses pertaining to the income shall be matched and reported in the same year in which such income is earned. Thus the revenues earned but not likely to be realised is reported as a bad debts in the same year in which the revenues are earned. The allowance is based on estimate. This estimation of bad debts is based on experience with historical data. Any violation of these concepts and principles is unethical. Reducing allowance for bad debts will end up having heavy write offs in the subsequent years and thus company have to push the recognition of expense to later years.

2. Obviously this action is a violation of ethics. Estimation of Doubtful Accounts are based on accounting standards and philosophies. According to the Matching concept of accounting , all corresponding expenses pertaining to the income shall be matched and reported in the same year in which such income is earned. Thus the revenues earned but not likely to be realised is reported as a bad debts in the same year in which the revenues are earned. The allowance is based on estimate. This estimation of bad debts is based on experience with historical data. Any violation of these concepts and principles is unethical. Reducing allowance for bad debts will end up having heavy write offs in the subsequent years and thus company have to push the recognition of expense to later years.

3.Internal controls may include,

• Person whose bonus is based on the company’s profit and loss statement shall have no access to the same.
• Segregation of duties between person who earns the bonus and person who makes the calculations at year end.
• Work done by one person shall come under the supervision of the other. Accordingly, the bonus computations have to be supervised or verified by somebody else independently.
• Lastly include auditing of books at closure of every year end.