Question

Discuss the ethical dilemma you face in the given scenario. Consider your options and responsibilities along with the possible consequences of any action you might take. Who are the parties affected? What factors should you consider in making your decision?

Scenario - You have recently been hired as the assistant controller for Stanton Industries. Your immediate superior is the controller who, in turn, reports to the vice president of finance. The controller has assigned you the task of preparing the year-end adjustments. For receivables, 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 Allowance for Uncollectible Accounts is $180,000. The existing balance in the allowance account prior to any adjustment 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.”

Answer 1

There is an ethical dilemma of choosing between right and wrong. The controller has asked us to change the ageing category of a large sum from over 120 days to current which results in decline in amount required for bad debts (uncollectibles) allowance by $45,000 which in turn will increase the reported net income in the statement of financial statements. Whereby the correct treatment is to treat that large balance as long outstanding for over 120 days and making appropriate allowance for uncollectibles which represents true and fair picture of financial statements of the entity as well as is state of affairs of business. As a responsible accounting professional we should not be engaging in such practices by compromising our ethics and professional standards. The treatment required by the controller would affect the organisation as well as its shareholders. Reporting of excess profits/net income may represent better financial position in the current scenario but it will also increase the risk of that amount being uncollectible since the debtor hasn't paid his dues for so long this affects the company's cash flows. Also reporting higher net income leads to payment of excess taxes on income and dividend payout to shareholders when in fact the company hasn't collected its cash thereby putting an excess burden of taxes and dividends. Also financial statemenst presented for accessing working capital loans will also be window dressed which if found will put in question the credibility of management and may as well be treated as defrauding banks by inflating assets.

As a responsible employee of the organisation I will present all these facts to my supervisor as well as to his senior where the organisation doesn't need to enagage in window dressing of its accounts which could backfire and may ultimately hurt the organisation.