Anton Blair Is The Manager Of A Medium-Sized Company 423501
Anton Blair Is The Manager Of A Medium Sized Company A Few Years Ago
Anton Blair is the manager of a medium-sized company. A few years ago, Blair persuaded the owner to base a part of his compensation on the net income the company earns each year. Each December, he estimates year-end financial figures in anticipation of the bonus he will receive. If the bonus is not as high as he would like, he offers several recommendations to the accountants for year-end adjustments; one of his favorite recommendations is for the controller to reduce the estimate of doubtful accounts. In your response, address the following: What effect does lowering the estimate of doubtful accounts have on the income statement and balance sheet? Do you believe Blair’s recommendation to adjust the allowance for doubtful accounts is within his right as a 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?
Paper For Above instruction
The scenario involving Anton Blair, a manager who advocates for adjusting the allowance for doubtful accounts near year-end to influence reported income, raises significant ethical and financial reporting concerns. Understanding the implications of such adjustments and implementing appropriate internal controls is vital to maintaining financial integrity.
At the core of the issue is the role of the allowance for doubtful accounts, a contra-asset account on the balance sheet that estimates the amount of accounts receivable unlikely to be collected. When Blair recommends reducing this allowance, the immediate effect is an increase in net accounts receivable and, consequently, an overstatement of total assets on the balance sheet. This overstatement can mislead financial statement users into believing the company has higher assets and better liquidity than it actually does.
On the income statement, reducing the allowance for doubtful accounts decreases the bad debt expense, thus artificially inflating net income for the period. This manipulation can be particularly problematic if it is driven by managerial incentives, such as Blair’s desire to increase his bonus based on higher net income. This practice risks creating a distorted view of the company's financial health and can lead to long-term issues if the false optimism prompts stakeholders to make decisions based on inaccurate information.
From an ethical standpoint, Blair’s recommendation to reduce the allowance for doubtful accounts appears to be a violation of ethical accounting principles. Generally Accepted Accounting Principles (GAAP) emphasize the importance of honesty, integrity, and fair representation of financial information (American Institute of Certified Public Accountants, 2022). Altering estimates for personal gain, especially in a way that understates expenses and inflates income, compromises the integrity of financial reporting. Such actions could also be considered a form of earnings management or even fraudulent if they intentionally misrepresent financial performance.
Whether Blair’s actions are within his legal rights depends on the context and governance of the company. Managers are typically permitted to make reasonable estimates within the scope of GAAP; however, deliberately manipulating estimates for personal benefit breaches ethical standards and can be challenged legally and professionally. Ethical governance requires that managers prioritize truthful reporting over personal bonuses, and any such recommendation for adjustment should undergo rigorous review and approval processes.
To prevent manipulative practices and ensure accurate financial reporting, companies should implement robust internal controls. An effective internal control system includes segregation of duties, where the responsibility for accounting estimates is separated from those with a direct financial stake in the outcome (COSO, 2013). For example, the process of approving year-end adjustments should involve independent review by internal auditors or senior management not involved in the initial estimates. Furthermore, periodic internal and external audits serve as critical safeguards, providing oversight and verifying the accuracy of financial statements (Public Company Accounting Oversight Board, 2023).
Additionally, establishing a strict code of ethics, combined with training programs that emphasize professional integrity, can reinforce ethical behavior within the organization. Whistleblower policies should also be in place to encourage employees to report unethical or suspicious activities without fear of retaliation. These controls and policies create a culture of transparency and accountability, reducing the likelihood of earnings manipulation.
In conclusion, lowering the allowance for doubtful accounts to inflate income is both ethically and potentially legally problematic. Such actions undermine the reliability and credibility of financial statements. Strong internal controls, including oversight, segregation of duties, and an ethical culture, are essential to prevent undue influence over accounting estimates and to promote truthful financial reporting. Ensuring ethical standards are upheld maintains stakeholder trust and sustains the long-term health of the organization.
References
American Institute of Certified Public Accountants. (2022). Code of Professional Conduct. AICPA. https://www.aicpa.org/content/dam/aicpa/research/standards/codeofconduct/downloadabledocuments/2022/2022-cpaco.pdf
Committee of Sponsoring Organizations of the Treadway Commission (COSO). (2013). Internal Control - Integrated Framework. COSO.
Public Company Accounting Oversight Board (PCAOB). (2023). Auditing Standard No. 5: An Audit of Internal Control Over Financial Reporting That Is Integrated with An Audit of Financial Statements. PCAOB. https://pcaobus.org/Standards/Auditing/Pages/Auditing_Standard_Standard_100.pdf