1. What effect does lowering the estimate for doubtful accounts have on the income statement and balance sheet?
The doubtful accounts are also referred to as the uncollectible accounts which are considered a contra asset account. It usually reduces the amount receivable to that which is more likely to be collected. In most cases, the expense of bad debts is part of the entry that increases the amount of allowance for uncollectible accounts in the income statement. Therefore, lowering the allowance for doubtful accounts would significantly reduce the number of expenses for the company while also overstating the net income of the company. On the balance sheet, once an organization does lower the estimate for doubtful accounts would communicate that the firm does not anticipate bad debts.
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2. Do you believe Blair's recommendation to adjust the allowance for doubtful accounts is within his rights as a manager, or do you believe this action is an ethics violation? Justify your response.
The recommendation made by Steinman to make adjustments to the allowance for doubtful accounts is an ethical violation. The actions of the manager are seen as a breach of ethical practice as the primary intent is to ensure a personal gain. Business leaders are expected to play their roles with critical consideration of the stakeholders in the firm. The changes made in the doubtful accounts have a direct impact on the bonus that the manager would earn at the end of the year as it significantly increases the net income of the company. The overstated net income of the company could significant affect the regular operation of the firm as it would experience accumulated bad debts and jeopardizing its financial health.
3. What type of internal control(s) might be useful for this company in overseeing the manager's recommendations for accounting changes?
Since the firm’s net income is directly tied to the bonus that the executive leader may receive at the end of the fiscal year, it is essential that internal controls are adjusted. Blair should not be in charge of actively changing accounting practices but should be provided assistance along with the other mid-level management staff. Such internal controls may be delegated solely by his superior, the accounting department, or an independent audit firm. In the case where Blair has a legitimate reason for making the changes, it should be justified in writing to the superior directors of the firm. A regular audit of the firm by an independent firm will ensure that the internal controls are followed to the letter.
