Kelly Steinman is the manager of a medium size company. A few years ago, Steinma

Question

Kelly Steinman is the manager of a medium size company. A few years ago, Steinman persuaded the owner to base a part of her compensation on the net income the company earns each year. Each December she estimates year-end financial figures in anticipation of the bonus she will receive. If the bonus is not as high as she would like, she offers several recommendations to the accountant for the year-end adjustments. One of her favorite recommendations is for the controller to reduce the estimate of doubtful accounts.

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Required
a. What effect does lowering the estimate for doubtful accounts have on the income statement and balance sheet?

b. Do you think Steinman

Explanation / Answer

1.doubtful accounts, or accounts where you think you will not get paid, are subtracted from income, so lowering estimate of doubtful accounts increases thecompany's reportednet income.

2. not within her rights as manager. as a manager she is supposed to be an agent acting in the best interests of the owner of the company. if the only reason she is suggesting accounting changes is to increase her compensation, then she is putting her own interests ahead of the company's/owner's interests. Especially since adjusting the company's net income could affect company decision making. if she has a good reason to lower doubtful account estimates (for example if the controller historically overestimates doubtful accounts, and she believes that this under-represents the company's net income) then she has not commited an ethics violation, but since the prompt clearly indicates that she makes her recommendations based on a desire to increase her own compensation, so she is no longer acting as a faithful agent for the owner, then yes, her actions constitute and eithics violation.

3. Anytime an accounting change affects the manager's compensation, the manager should include a brief justification to be forwarded to the owner, or the board of directors.

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