Caldwell Interiors, a successful retail furniture company, is located in an affluent suburb where a major insurance company has just announced a restructuring that will lay off 4,000 employees. Caldwell Interiors sells quality furniture, usually on credit. Accounts receivable is one of its major assets. Although the company’s annual uncollectible accounts losses are not out of line, they represent a sizable amount. The company depends on bank loans for its financing. Sales and net income have declined in the past year, and some customers are falling behind in paying their accounts.
Abby Caldwell, the owner of the business, knows that the bank’s loan officer likes to see a steady performance. She has therefore instructed the company’s controller to underestimate the uncollectible accounts this year to show a small growth in earnings. Caldwell believes this action is justified because earnings in future years will average out the losses, and since the company has a history of success, she believes the adjustments are meaningless accounting measures anyway.
Are Caldwell’s actions ethical? Would any parties be harmed by her actions? How important is it to try to be accurate in estimating losses from uncollectible accounts?