Astin Blair is the manager of a medium-size company. A few years ago, Blair pers

Question

Astin 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 he would like, he offers several recommendations to the accountant for year-end adjustments. One of his favorite rocemmendations is for the controller to reduce the estimate of doubtful accounts.

1-What effect does lowering the estimate for doubtful accounts have on the income statement and balance sheet?

2- Do you believe Blair 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 you response

3- What type of internal controls might be useful for this company in oversseing the managers recommendations for accounting changes?

6 Line for answers or more pleases!!!!!!!

Explanation / Answer

1. The allowance for doubtful accounts is a contra-asset. Therefore, if it is decreased, it will essentially increase the value of the firms receivables (which is an asset) on the balance sheet. On this income statement, this will have no long term effect (although in the short run more revenue will be recognized and income will be inflated, but when the excess bad debts are determined, they will be expensed). 2. In most cases, such as this one, earnings management is considered to be unethical. Although a company may have good reason to reduce the allowance estimate, using it to manage earnings may have legal consequences (if material). 3. Make sure the manager is not given permission to fire the accountant for any reason. Even though firing an accountant (or any employee) for refusing to engage in behavior that a reasonable person might believe unethical (or illegal) is considered to be wrongful termination (and would likely result in litigation), a manager might be able to find other reasons to fire him/her. In addition, I would recommend that the manager not be allowed to instruct the accountant on any accounting practices unless asked.

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