Question

I'd like to direct your attention to the Ethical Dilemma. The organization has experienced a significantly profitable year, and the team brainstorms ideas to bank some of the profits, for future offsets. One suggestion in the dilemma is to hide it by falsely inflating the bad debt of the company. This will appear to investors as though a larger portion of the revenue has not yet been received. Has anyone, by chance, seen this scenario play out in their organizations?

Answer 1

This scenario is very common in various organizations and is used as a way of window dressing the accounts. In this strategy the company increases the amount of bad debts so as to reduce the net income of the current year. This income can be booked in their later years as bad debts recovered. However the financial statements of the company are required to be accompanied with notes to accounts which disclose the methods used for calculating and estimating bad debts. There must be a basis for the estimation so made. The company can get into trouble when the accounts are audited and the window dressing can be revealed thus spoiling the goodwill of the business. Also this is an unethical way of preparing the financial statements.