The management of the Auto Parts Division of the Santana Corporation receives a
ID: 2544246 • Letter: T
Question
The management of the Auto Parts Division of the Santana Corporation receives a bonus if the division's income achieves a specific target. For 2013 the target will be achieved by a wide margin. Mary Beth Williams, the controller of the division, has been asked by Philip Stanton, the head of the division's management team, to try to reduce this year's income and "bank" some of the profits for future years. Mary Beth suggests that the division's bad debt expense as a percentage of net credit sales for 2013 be increased from 3% to 5%. She believes that 300 is the more accurate estimate but knows that both the corporation's internal auditors as well as the external auditors allow some flexibility when estimates are involved. Does Mary Beth's proposal present an ethical dilemma?Explanation / Answer
The ethical issues concerning the reduction in income and bank balance to reduc e the bonus bill of the division is that
It is totally unethical on the part of Mary Beth Williams to try to reduce the bonuses, as 2013 results are very good and bonus is coming at a higher level.
The accounting issues in the case are that the bad debt provision has to be raised so that expenses got increased and final income figure would come at a lower level.
The alternative action to such unethical action is that a unanimously decision should be taken to reduce the bonus percentage, so that bonus provision for the bad period should be kept in abeyance.
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