BYP8-3. Ethics Case
The controller of Proust Company has completed draft financial statements
for the year just ended and is reviewing them with the president. As part of
the review, he has summarized an aging schedule showing the basis of
estimating uncollectible accounts using the following percentages: 0-30
days, 5%; 31-60 days, 10%; 61-90 days, 30%; 91-120 days, 50%; and over
120 days, 80%.
The president of the company, Suzanne Bros, is nervous because the bank
expects the company to sustain a growth rate for profit of at least 5% each
year over the next two years-the remaining term of its bank loan. The
profit growth for the past year was much more than 5% because of certain
special orders with high margins, but those orders will not be repeated next
year, so it will be very hard to achieve even the same profit next year, and
even more difficult to grow it another 5%. It would be easier to show an
increase next year if the past year's reported profit had been a little lower.
President Bros recalls from an accounting course that bad debt expense is
based on certain estimates subject to judgement. She suggests that the
controller increase the estimate percentages, which will increase the
amount of the required bad debt expense adjustment and therefore lower
profit for last year so that it will be easier to show a better growth rate next
year.
Instructions
(a) Who are the stakeholders in this case?
(b) Does the president's request create an ethical dilemma for the controller?
(c) Should the controller be concerned with Proust Company's reported profit growth rate in
estimating the allowance? Explain your answer.