Discussion and 2 replies

Ethics Case

CT8.9 As its year-end approaches, it appears that Mendez Corporation’s net income will increase 10% this year. The president of Mendez Corporation, nervous that the stockholders might expect the company to sustain this 10% growth rate in net income in future years, suggests that the controller increase the allowance for doubtful accounts to 4% of receivables in order to lower this year’s net income. The president thinks that the lower net income, which reflects a 6% growth rate, will be a more sustainable rate of growth for Mendez Corporation in future years. The controller of Mendez Corporation believes that the company’s yearly allowance for doubtful accounts should be 2% of receivables.

Instructions

Who are the stakeholders in this case?

Does the president’s request pose an ethical dilemma for the controller?

Should the controller be concerned with Mendez Corporation’s growth rate in estimating the allowance? Explain your answer.

Post by classmate 1

 

Who are the stakeholders in this case?

The stakeholders in this case are the stockholders of the Mendez Corporation. The stockholders are looking for an accurate representation of net income at the end of the year. The controller is also a stakeholder because he is acting on the request of the president and will be the one who ultimately increases the allowance for the doubtful accounts.

Does the president’s request pose an ethical dilemma for the controller?

This scenario poses an ethical dilemma for the controller because the President of Mendez Corporation is asking him to increase an allowance in a doubtful account which will reflect upon a lower net income value. The controller is being given a request to complete an action which could have fallout on the stockholders of the company due to a reduced increase in net income at year’s end.

Should the controller be concerned with Mendez Corporation’s growth rate in estimating the allowance? Explain your answer.

The controller should be concerned with Mendez Corporation’s growth rate in estimating allowance due to the potential for growth also leading to potential for growth in yearly allowance for doubtful accounts (given an increase in business transactions). The controller believes the doubtful accounts should be at 2%, but maintaining doubtful accounts at this level will not decrease net income to 6% (as the President requested). The company’s net income growth may also decrease the next year if estimating the allowance to 4% continues; there is potential for more accounts to not fulfill their financial obligations to the company, within the allowance amount, thus leading to decreases in yearly net income in the next year’s end.

Post by classmate 2

 

Option 1: Critical Thinking — Ethics Case

1. Who are the stakeholders?
    
   1. The stakeholders in this case are the stockholders, employees, and the controller. All of these groups are unaware of the changes to the receivables accounts that the president of Mendez Corporation is trying to make. 
       
2. Does the president’s request pose an ethical dilemma for the controller?
    
   1. The controller is placed in an ethical dilemma when the president asks her to increase the allowance for doubtful accounts. Ethical dilemmas entail doing something that you know is wrong but are being coerced into doing it by someone with more authority than you. The ethical dilemma in this situation is between the president and controller. 
       
3. Should the controller be concerned with Mendez Corporation’s growth rate in estimating the allowance? Explain your answer. 
    
   1. Yes, the controller should be concerned with Mendez Corporation's growth rate when estimating the allowance. The deduction created this year will only defer  this year's revenue to next year. The real question is will Mendez Corporation be able to sustain this growth into next year? 
       

References

Kimmel, P., Mitchell, J., Weygandt, J. (2021) Accounting tools for business decision making. Wiley