EZ Loan Co. makes loans to high risk borrowers. EZ borrows from its bank and then lends money to people who have bad credit. The bank requires EZ loan to submit quarterly financial statements in order to keep it line of credit. EZ main asset is Accounts Receivable. Therefore, Bad Debt Expense and Allowance for Bad Debts are important accounts.

Slade McMurphy, the controller of EZ Loan, wants net income to increase in a smooth pattern rather than increase in some periods and decrease in others. To report smoothly increasing net income, McMurphy underestimates Bad Debt Expense in some periods. In other periods, McMurphy overestimates the expense, He reasons that over time, the net income overstatement roughly offset the income understatements.

Is McMurphy's practice of smoothing income ethical? Why or Why not?