The controller of Proust Company has completed draft financial statements for the year just ended and is reviewing them with the president. As part of the review, he has summarized an aging schedule showing the basis of estimating uncollectible accounts using the following percentages: 0-30 days, 5%; 31-60 days, 10%; 61-90 days, 30%; 91-120 days, 50%; and over 120 days, 80%.
The president of the company, Suzanne Bros, is nervous because the bank expects the company to sustain a growth rate for profit of at least 5% each year over the next two years-the remaining term of its bank loan. The profit growth for the past year was much more than 5% because of certain special orders with high margins, but those orders will not be repeated next year, so it will be very hard to achieve even the same profit next year, and even more difficult to grow it another 5%. It would be easier to show an increase next year if the past year's reported profit had been a little lower. President Bros recalls from her college accounting course that bad debt expense is based on certain estimates subject to judgement. She suggests that the controller increase the estimate percentages, which will increase the amount of the required bad debt expense adjustment and therefore lower profit for last year so that it will be easier to show a better growth rate next year.
Instructions
(a) Who are the stakeholders in this case?
(b) Does the president's request create an ethical dilemma for the controller?
(c) Should the controller be concerned with Proust Company's reported profit growth rate in estimating the allowance? Explain your answer.