The purpose of the creation of allowance for doubtful debts accounts is to keep separate some portion of the income to meet the actual bad debts occurring during the coming accounting. That shows that the creation of such an allowance actually reduces the amount of income by that amount. That is why when the estimate for doubtful accounts is lowered, the income is less reduced or affected by making such lowering of the estimate for doubtful debts. One can say that when the estimate is lowered as compared to the earlier accounting period, fewer amounts are charged to income as compared to the previous accounting period.
A manager is well versed in the behavior of accounts receivables. It is the manager who can make an accurate estimate of doubtful accounts receivables. Therefore, lowering or increasing the provision for an estimate of doubtless debts is basically a performance of managerial duties, and nothing is ethically wrong in this action. Such an action cannot be treated as a violation of accounting ethics. But when recommendations are sole with an ulterior motive of increasing the bonus calculations, then certainly there would be an accounting violation on the part of the manager.
Required internal controls to check the accounting recommendations of managers are as under:
- Preview the occurrence of such recommendations in earlier years.
- Analyze the payment or transaction behaviors or performance of the accounts, wherein adjustments are suggested.
- If the suggestion is for the provision of doubtful debts, check the occurrences of earlier bad debts in the account.