Question

1. Far-2-Ezy (F2E) makes loans to high-risk borrowers. F2E borrows from its bank and then lends money to people with bad debt histories. The bank requires F2E to submit quarterly financial statements in order to keep its line of credit. F2E’s main asset is Bills Receivable. Therefore, Uncollectable Bills Expense and Allowance for Uncollectable Bills are important accounts.

Katie Bamber, the owner of F2E wants net profit to increase in a smooth pattern, rather than increase in some periods and decrease in others. To smooth out increasing net profits, Katie underestimates Uncollectable Bills Expense in some periods when net profits don’t fit the smooth increasing pattern. In other periods, Katie overestimates the expense. She reasons that over time profit over statements roughly cancel out profit under statements.

Question: Use the stakeholder analysis framework described in accounting information system, to   analyze if there is an ethical dilemma if Bamber smoothest out profits. Refer to accounting standards, disclosure and any laws applicable in your analysis.

Answer 1

F2E Loan’s practice of smoothing income is unethical because the owner deliberately underestimates Uncollectible-Bills Expense in some periods and overstates the expense in other periods. The purpose is to manipulate income. Instead, the company should be using accounting information, specifically the company’s past collection history, to develop a consistent method of reporting allowance for Uncollectible-Bills , such as is done with bills receivable.  This would be in conformance with the principles of consistency and reliability, and would represent the business truthfully to his bank lender.