You have been recently hired as an assistant controller for XYZ Industries, a large, publically held manufacturing company. Your immediate supervisor is the controller who also reports directly to the VP of Finance. The controller has assigned you the task of preparing the year-end adjusting entries. In the receivables area, you have prepared an aging accounts receivable and have applied historical percentages to the balances of each of the age categories. The analysis indicates that an appropriate estimated balance for the allowance for uncollectible accounts is $180,000. The existing balance in the allowance account prior to any adjusting entry is a $20,000 credit balance.

After showing your analysis to the controller, he tells you to change the aging category of a large account from over 120 days to current status and to prepare a new invoice to the customer with a revised date that agrees with the new category. This will change the required allowance for uncollectible accounts from $180,000 to $135,000. Tactfully, you ask the controller for an explanation for the change and he tells you We need the extra income, the bottom line is too low.

Required:

1. Consider what you have learned relative to ethics and financial reporting. What is the rationale for the calculations/process used to estimate the $180,000 uncollectible allowance?
2. How do you think the misstatement of funds will impact the income statement and balance sheet?
3. What is the ethical dilemma you face? What are the ethical considerations? Consider your options and responsibilities as an assistant controller.
4. Identify the key internal and external stakeholders. What are the negative impacts that can happen if you do not follow the instructions of your supervisor?
5. What are the potential consequences if you do comply with your supervisors instructions? Who will be negatively impacted?