Scott Kreiter Financial Services Company holds a large portfolio of debt and stock securities as an investment. The total fair value of the portfolio at December 31, 1998, is greater than total cost, with some securities having increased in value and others having decreased. Vicki Lemke, the financial vice-president, and Ula Greenwood, the controller, are in the process of classifying for the first time the securities in the portfolio.

Lemke suggests classifying the securities that have increased in value as trading securities in order to increase net income for the year. She wants to classify the securities that have decreased in value as long-term available-for-sale securities so that the decreases in value will not affect 1998 net income.

Greenwood disagrees. She recommends classifying the securities that have decreased in value as trading securities and those that have increased in value as long-term available-for-sale securities. Greenwood argues that the company is having a good earnings year and that recognizing the losses now will help to smooth income for this year. Moreover, for future years, when the company may not be as profitable, the company will have built-in gains.

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(a) Will classifying the securities as Lemke and Greenwood suggest actually affect earnings as each says it will?

(b) Is there anything unethical in what Lemke and Greenwood propose? Who are the stakeholders affected by their proposals?

(c) Assume that Lemke and Greenwood properly classify the portfolio. Assume, at yearend, that Lemke proposes to sell the securities that will increase 1998 net income, and that Greenwood proposes to sell the securities that will decrease 1998 net income. Is this unethical?