Kelly Steinman is the manager of a medium-size company. A few years ago, Steinman persuaded the owner to base a part of her compensation on the net income the company earns each year. Each December she estimates year-end financial figures in anticipation of the bonus she will receive. If the bonus is not as high as she would like, she offers several recommendations to the accountant for year-end adjustments. One of her favorite recommendations is for the controller to reduce the estimate of doubtful accounts.
Required
What effect does lowering the estimate for doubtful accounts have on the income statement and balance sheet?
Do you believe Steinman’s recommendation to adjust the allowance for doubtful accounts is within her right as 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?