Corporate Financial Accounting 14th Edition by Carl Warren,James Reeve,Jonathan Duchac

Exercise 56

Ethics In Action
Bud Lighting Co. is a retailer of commercial and residential lighting products. Gowen Geter, the company's chief accountant, is in the process of making year-end adjusting entries for uncollectible accounts receivable. In recent years, the company has experienced an increase in accounts that have become uncollectible. As a result, Gowen believes that the company should increase the percentage used for estimating doubtful accounts from 2% to 4% of credit sales. This change will significantly increase bad debt expense, resulting in a drop in earnings for the first time in company history. The company president, Tim Burr, is under considerable pressure to meet earnings goals. He suggests that this is "not the right time" to change the estimate. He instructs Gowen to keep the estimate at 2%. Gowen is confident that 2% is too low, but he follows Tim's instructions.
Evaluate the decision to use the lower percentage to improve earnings. Are Tim and Gowen acting in an ethical manner?