Ethics

Business 205

Ethics Project-Ch 7

05/26/10

Today in the business world, employees are forced to make ethical decisions on a day-to-day basis. Although most businesses implement internal controls to help deter employees from making an ethical violation, some employees find a way around these controls. When they do, this it puts the business in danger of not only financial problems but possible legal problems. It also puts their fellow employees and investors in danger as in what happened in the Enron scandal in 2001. Most people usually make the ethically correct decision, but when one doesn’t it puts many in danger for only ones gain.

Depending on how much, lowering the estimate for doubtful accounts can have a major effect on the balance sheet. Allowance for doubtful accounts is a contra account and is used for reducing accounts receivable. Accounts receivable is an asset, so if allowance for doubtful accounts reduces it, assets will be overestimated if he lowers the estimated amount of doubtful accounts. His decision will also have an effect on the income statement. If he does lower the estimate for doubtful accounts it will increase net income. It will look like the company is making more money than it really is.

I believe that Blair’s recommendation to adjust the allowance for doubtful accounts is an ethical violation. Since he is getting a bonus based on the company’s net income and the doubtful accounts can change net income is why I think it’s unethical. Also since he persuaded them to do this, it seems like he has had this planned out. I wouldn’t think it is unethical if he wasn’t getting a bonus. If he wasn’t then it would look like to me that he is just trying to better the company.

One internal control that could be put into force is establishing responsibilities. They should have just one person in charge of adjusting the allowance for doubtful accounts. Even though it kind of seems like they already have this, the manager...