You have recently been hired as the assistant controller for Stanton Industries,

Question

You have recently been hired as the assistant controller for Stanton Industries, a large, publicly held manufacturing company. Your immediate superior is the controller who, in turn, is responsible to the vice president of finance.

The controller has assigned you the task of preparing the year-end adjusting entries. In the receivables area, 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 that an appropriate balance for the allowance for uncollectible accounts is $180,000. The existing balance in the allowance account prior to any adjusting entry 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 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?

Consider your options and responsibilities along with the possible consequences of any action you might take.

Discuss the ethical dilemma you face and what you would do.

Explanation / Answer

The approporiate balance of allowance for uncollectible accounts is $180,000. The controller wants to reduce the allowance figure by $45,000 (180,000-135,000) to $135,000 under the mask of an apparent change in the aging category of accounts receivables. This reduction in allowance will increase the bottomline or the net profit of the company and the controller has clearly stated that he is introducing this change to shore up the profits.

The effect on income before taxes will be an increase of $45,000 (180,000-135,000). Your options are that either you can comply with the controller's recommendation and reduce the allowance amount or say that this is a form of window dressing of books and that you will not let it happen. Consequences if you comply with the controller's request - you will be doing a wrong thing and this will reduce your image as an honest employee if other employees get to know of this development. Consequences if you do not comply with the controller's request - you will be regarded as a fair and honest employee.

The ethical dilemma you face is whether you should allow the controller do the window dressing of the books of accounts and secure your job or whether you should stop this falsification of accounts from happening and face a probable loss of job. You should not comply with the controller's request as you will be compromising with your morals and will be sacrificing your integrity.

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