Randy Meyer is the chief executive officer of a medium-sized company in Regina, Saskatchewan. Several years ago, Randy persuaded the board of directors of his company to base a percent of his compensation on the net income the company earns each year. Each December, Randy estimates year-end financial figures in anticipation of the bonus he will receive. If the bonus is not as high as he would like, he offers several accounting recommendations to his controller for year-end adjustments. One of his favourite recommendations is for the controller to reduce the estimate of doubtful accounts. Randy has used this technique with success for several years.
1. What effect does lowering the estimate for doubtful accounts have on the income statement and balance sheet of Randy's company?
2. Do you think Randy's recommendations to adjust the allowance for doubtful accounts is within his right as CEO or do you think this action is an ethics violation? Justify your response.
3. What type of internal control might be useful for this company in overseeing the CEO's recommendations for accounting changes?