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Ethics Case - Uncollectible Accounts

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You have recently been hired as the assistant controller for Stanton Industries. Your immediate supervisor is the controller, who in turn, reports to the vice president of finance. The controller has assigned you the task of preparing the year-end adjustments. For receivables, 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 as appropriate balance for Allowance for Uncollectible Accounts is $180,000. The existing balance in the allowance account prior to any adjustments 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 the 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? Ethically, what are my options and responsibilities along with the possible consequences of any action I take?

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Solution Summary

Discusses impact of changing the uncollectible account on income before taxes.

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The income will go up due to decline in the expense related to uncollectible accounts.

My options are to either adhere to my controller's instructions or deny his request and stick to ethical guidelines and standards. It is my responsibility to prepare the financial statements as per the ...

Solution provided by:
Sandeep Bardia, MBA
Education
  • BCom, SGTB Khalsa College, University of Delhi
  • MBA, Rochester Institute of Technology
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