Discussion: The Ethics of Managing the Allowance for Uncollectible Accounts

Pick any publically traded company of your choice and find out - who the CEO of this company is - what Earnings per Share (EPS) were last year.

Assume you are that CEO. Your chief financial officer (CFO) informs you that this year your company will not be able to meet the EPS levels you had last year. In that event your stock price will likely decline. The CFO proposes reducing the quarterly provision for uncollectible amounts (bad debt expense) to increase your EPS to the level analysts expect. This will result in an allowance that is less than it should be. The CFO explains that outsiders cannot easily detect a reduction in this allowance and that the allowance can be increased next year. The benefit is that your shareholders will not experience a decline in stock price.

Discuss:

1. How will reducing this year's provision for uncollectible accounts affect the income statement and the balance sheet THIS YEAR? How will it affect the income statement and the balance sheet next year/future years?

2. Try to think of an argument that the CFO might use to convince the company's internal auditors that this action is justified?

3. How might an analyst detect this earnings management activity?

4. How might this action affect the moral compass of your company? What repercussions might this action have?

Your initial post should be at least 200 words. Please also respond to at least two other students' posts.