Accounting Ethics

In: Business and Management

Submitted By shenyangming
Words 2092
Pages 9
Case 2-8

“I’m sorry, Lucy. That’s the way it is.” Ricardo Rikey said. “I just don’t know if I can go along with it, Rikey.” “We have no choice. Juggyfroot is our biggest client, Lucy. They’ve warned us that they will put the engagement up for bid if we refuse to go along with the reclassification of marketable securities.” “Have you spoken to Fred and Ethel about this?” Lucy asked. “Are you kidding? They’re the ones who made the decision to go along with Juggyfroot,” Rikey responded. The previous scene took place in the office of Deziloo LLP, a large CPA firm in Beverly Hills, California. Lucy Spheroid is the partner on the engagement of Juggyfroot, a global manufacturer of pots and pans. Ricardo Rikey is the managing partner of the office. Fred and Ethel are the two members of the firm that make final judgments on difficult accounting issues especially when there is a difference of opinion with the client. All four are CPAs. Ricardo Rikey is preparing for a meeting with Norman Baitz, the CEO of Juggyfroot. Rikey knows that the company expects to borrow $5,000,000 next quarter and it wants to put the best face possible on its financial statements to impress the banks. That would explain why the company had reclassified a $2,000,000 market loss on a trading investment to the available-for-sale category so that the “loss” would now show up in stockholder’s equity and not as a charge against current income. The result was to increase earnings in 2010 earnings by 8 percent. Rikey also knows that without the change, the earnings would have declined by 2 percent and the company’s stock price would have taken a hit. In the meeting, Rikey points out to Baitz that the investment in question was made in an affiliate company that Juggyfroot had owned for six years. Rikey adds there is no justification under generally accepted…...

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