ACCOUNTING ETHICS

Im sorry, Jen. Thats the client's position, Travis said.

I just dont know if I can go along with it, Travis, Jen replied.

I know. I agree with you. But, Chefs Delight is our biggest client, Jen. Theyve warned us that they will put the engagement up for bid if we refuse to go along with the reclassification of marketable securities, Travis explained.

Jen asked, Have you spoken to the engagement review partners about it?

"They recommended giving in to the client on this matter," Travis responded.

"Listen, I understand the pressures of being the engagement partner and the need to keep the client happy, but this goes too far", Jen said.

The previous scene took place in the office of Trending Upwards, a large CPA firm in Beverly Hills, California. Jen is the Senior Manager on the engagement of Chefs Delight, a publicly owned global manufacturer of Chefs cookware. Travis is the Partner in charge of the engagement. The engagement review partners make final judgments on difficult accounting issues, especially when there is a difference of opinion with the client. All of these individuals are CPAs.

Travis is preparing for a meeting with Chef Norman, the CEO of Chefs Delight. Travis 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 category so that the loss would now show up in stockholders equity, not as a charge against current income. The result was to increase earnings in 2021 by 8 percent. Travis knows that without the change, the earnings would have declined by 2 percent and the companys stock price would have taken a hit.

In the meeting, Travis decides to overlook the recommendation by the engagement review partners. He felt Jen made valid points. Travis points out to Chef that the investment in question was marketable, and in the past, the company had sold similar investments in less than one year. Travis adds there is no justification under GAAP to change the classification from trading to available-for-sale.

What happened next shocked Travis back to reality. The conversation between Chef Norman and Travis went this way.

I hate to bring it up, Travis, but do you recall what happened last year at about the same time?

What do you mean?, Travis replied

Chef then stated You agreed that we could record $1 million as revenue for 2020 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 2021.

Travis remembered all too well. It almost cost the firm the Chefs Delight account. Are you going to throw that in my face? Travis said rather heatedly.

No, Travis, Just a gentle reminder that you had agreed to go along with what we had asked at that time. We believe there is enough gray area to do the same here. Who knows, we may hold on to the investment for more than one year," Chef said calmingly.

The meeting broke up when Chef received a confidential phone call. They agreed to continue it first thing in the morning. Chef Norman's parting words were "we value loyalty in our accountants."

Assume you are in Travis's position and preparing for the meeting with Chef Norman in the morning. Consider the following in crafting a response to him.

1. What levers can you use to influence Chef Norman?

2. What is at stake for the key parties?