Ethical Obligations and Decision Making in Accounting, 4/e 1
Case 2-8 Juggyfroot
“I’m sorry, Lucy. That’s the way it is,” Ricardo said. The client wants it that way.
“I just don’t know if I can go along with it, Ricardo,” Lucy replied.
“I know. I agree with you. But, 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,” Ricardo explained.
Ricardo Rikey is preparing for a meeting with Norman Baitz, the CEO of Juggyfroot. Ricardo
knows that the company expects to borrow $5 million next quarter and it wants to put the best
possible face on its financial statements to impress the banks. That would explain why the
company reclassified a $2 million market loss on a trading investment to the available-for-sale
In the meeting, Ricardo decides to overlook the recommendation by Fred and Ethel. Ricardo
points out to Baitz that the investment in question was marketable, and in the past, the company
had sold similar investments in less than one year. Ricardo adds there is no justification under
generally accepted accounting principles (GAAP) to change the classification from trading to
available-for-sale.
Ethical Obligations and Decision Making in Accounting, 4/e 2
“What do you mean?”
“You agreed that we could record $1 million as revenue for 2014 based on a sale of our product
that we held at an off-site distribution warehouse until the client asked for delivery, which
occurred in 2015.”
Questions
1. Should Ricardo let what happened last year affect how he approaches the issue of
the improper recording of marketable securities when he resumes his discussion
with Baitz in the morning? Why or why not?
It is tempting to continue going along with unethical actions once we have agreed to
overlook unethical acts. Ricardo has already begun the slide down the proverbial ethical
slippery slope and it will be difficult to hold the line on the recording of the $2 million in
2. How would you handle the issue if you were in Ricardo’s position? Develop an
action plan to get your point of view across. What would you say? What do you
expect the objections or push-back will be? How would you convince Baitz of the
rightness of your position?
Ricardo should tell Baitz immediately he can no longer go along with questionable
accounting reclassifications that would lead to misleading financial statements. Although
last year he agreed to the acceleration of revenue, that does not mean he will always go
Ethical Obligations and Decision Making in Accounting, 4/e 3
Extended Discussion of Ethical Issues
Ricardo is asked by Baitz to classify an investment so that current income will increase; Ricardo
refused to go along with the reclassification. The ethical theories are discussed below:
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.
