Gelt and Moola
Gelt Systems is a publicly-owned corporation based in Portland, Oregon. Gelt
designs and develops networks communication hardware and software products and
provides related support services. Gelt is audited by Ducks and Beavers LLP, a regional
firm located in Portland.
Daisy Love has worked for Ducks and Beavers for two years since graduating
from the accounting program at Portland State University. On March 21, 2011, during
the firm’s audit of Gelt Systems, Love discovered a transaction by Gelt that just doesn’t
pass the smell test. Unfortunately, there is no one at the firm to call for advice because
the senior on the audit has been in the hospital for the past five days since suffering a
herniated disk. Daisy is the only staff member still on the Gelt audit; all other staff
returned to the main office after lunch. She plans to meet with Donny Donero, the
manager of the audit who is a CPA in Oregon, on March 22 to discuss the matter.
The transaction that concerns Love took place with Moola Yearning, a closely-
held computer products company in Portland, on December 30, 2010, one day before the
close of the calendar year. On that day, Gelt agreed to sell $1 million of software to
Moola in return for a stock issuance of that company. Moola, in return, agreed to sell $1
million of similar software from Gelt on January 5, 2011 in return for a stock issuance
from Gelt.
Love isn’t sure how to account for the transaction. She knows the amount is
material but doesn’t know quite what to make of the investment in Moola or that
company’s agreement to purchase Gelt products after year end.
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This case discusses a staff finding audit evidence that does not pass the smell test. Daisy
should research the proper treatment and present the information to Donny Donero about
situation.
Ethical Issues
Investors rely on the accuracy of the financial statement information. If revenue is
deliberately overstated, then these users will be making investment decisions based on
incorrect information. The SEC expects a public company to report truthful information
in all of its filings with the Commission. The accounting profession is harmed when an
accountant compromises integrity by going along with a position that is not justified
under the rules. Under AICPA Code CPAs have an obligation to have integrity,
objectivity, and to follow GAAP. Using rights theory, it is not right to mislead the
investors by making it look as though the company is doing better than it really is. Any
attempt to intentionally misstate the financial statements violates the categorical
imperative. Using justice theory, stakeholder interests are not fairly represented because
the perceived interests of the management are given priority over the interest of all other
stakeholders. Rule-utilitarianism requires that the correct rule should be followed. Act-
utilitarianism requires that the act that creates the greatest good for the greatest number of
stakeholders should be selected. None of the stakeholders benefit from an action that
misstates net income. Using virtue theory, honesty requires that the statements should be
truthful and recognize revenue using generally accepted accounting principles.
Objectivity requires that the company should approach its decision about the proper
revenue recognition procedure with fair-mindedness and without partially to one set of
stakeholders. Trustworthiness means that the accountants should not violate the
investors’ faith that the statements are accurate and reliable.
Questions
Use the ethical decision making model to help answer the questions below. Be sure to
address relevant provisions of the AICPA Code of Professional Conduct and ethical
reasoning.
1. How do you think the transaction should be accounted for? What justifies
such treatment in accounting?
The transaction does not seem to be an arm’s length transaction, but rather a way for
Gelt to recognize revenue at year end and do a round-trip transaction so the Moola
can recognize revenue the next year. The smell test says that Gelt is managing
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2. Kelly Hudson is the CFO of Gelt, She holds the CPA certificate in Oregon.
What are the ethical and professional responsibilities of Donero and Hudson?
The actions of Donero and the firm will violate the integrity standard of the AICPA
Code of Professional Conduct if the client’s judgment is given priority over
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3. Donero approaches Kelly who tells him the company will not budge from its
revenue treatment of the December 30, 2010, transaction. She claims to be
supported by the CEO of the company. Given your answer to question one,
what would you advise Donero to do at this point? Why?
Ducks and Beavers should also go to reason with Gelt Systems using rights, justice,
utilitarianism, and virtue theories. If Marx insists on record all of the cash that Gelt
invested in Moola as revenue in the current year, the tone at the top of Gelt needs to
concern Donero. He needs to be considering his alternatives in this situation. Donero
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