Mullin Interiors, a successful retailer of high-quality furniture, is located in
ID: 2653748 • Letter: M
Question
Mullin Interiors, a successful retailer of high-quality furniture, is located in affluent suburb where a large insurance company has just announced that it will lay off 4,000 employees. Because most of Mullin Interiors' sales are mad on credit, accounts receivable is one of its major assets. Although the company's annual losses from uncollectible accounts are not out of line, they represent a sizable amount. The company depends on bank loans for its financing. Sales and net income have declined in the past year, and some customers are falling behind in paying their accounts.
Veronica Mullin, the owner, knows that the bank's loan officer likes to see a steady performance. She has therefore instructed the company's controller to underestimate the uncollectible accounts this year to show a small growth in earnings. Mullin believes this action is justified because earnings in future years will average out the losses. Since the company has a history of success, she believes the adjustments are meaningless accounting measures anyway.
Are Mullin's actions ethical? Would any parties be harmed by her actions? How important is it to try to be accurate in estimating losses from uncollectible accounts?
Explanation / Answer
First of all, Mulin's actions are highly unethical.
The parties impacted by her actions are the bankers and the sharholders of the company. Such undue accounting adjustment might lead to reporting lower turnover, better than actual profitability and better working capital intensity than actuals. The above parameters are important from a banker's point of view. Additionally, the shareholders would be presented a wrong picture of the actual performance.
Losses from uncollectible accounts can be detrimental to the going concern of the business. As such, the true performance should be presented to the stakeholders so that they can take the approriate decision based on that.
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