Kelly Steinman is the manager of a medium-size company. A few years ago, Steinma
ID: 2450636 • Letter: K
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 year-end adjustments. One of her favorite recommendations is for the controller to reduce the estimate of doubtful accounts.
Required
What effect does lowering the estimate for doubtful accounts have on the income statement and balance sheet?
Do you believe Steinman’s recommendation to adjust the allowance for doubtful accounts is within her right as the 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?
Explanation / Answer
Usually companies would record the income when sales occured, but not when the payments are received.
1. Doubtful accounts are the accounts which companies feel would not get paid and hence would be substracted from net income. Therefore lowering the value of estimated doubtful accounts would increase the value of net income.
2. Its not within her rights, because as a manager she must act like an agent of owner interests. In case of she suggesting just for a hike in compensation, its regarded as she is putting her own interest ahead of company owner's interest. Specifically if she do have a good justified reason for adjusting allowance doubtful accounts, then its not ethical voilation. But here it is clearly indicative that she is making her recommendations in expectation of benefits from company, its no longer a faithful action towards owner and hence ethical voilation.
3. Whenever the manager compensation gets reflected with accounting changes suggested, then the manager must include a brief description which were to be forwarded to owner or board of directors.
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