Margaret is the manager of a medium-size company. A few years ago, Margaret persuaded the owner to base a part of her compensation on the net income of the company. 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.

1. What effect does lowering the estimate for doubtful accounts have on the income statement and balance sheet?

2. Do you believe Margaret'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.

3. What type of internal control(s) might be useful for this company in overseeing the manager's recommendation for accounting changes?