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 refuce to go along with the reclassification of marketable securities." Ricardo explained.

"Have you spoken to Fred and Ethel about this? Lucy asked

"are you kiddin? They're th eones who made the decisions to go along with Juggyfroot," Ricardo responded.

"I don't care, Ricardo, I expect more from you. I did not join this firm to compromise my values."

The previous scene took place in the office of Deziloo LLP, a large CPA firm in Beverly Hills, Ca. Lucy Spheroid is the partner on the engagement of Juggyfroot, a publicly owned global manufacturer of pots and pans and other household items. Ricardo Rikey is the managing partner of the office. Fred and Etherl are the engagement review partners that make final judgements on difficult accounting issues, especially when there is a difference of opinion with the client. All four are CPA's.

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 $2million market loss on a a trading investment to the available-for-sale category so that the loss would now showp-up in stockholder's equity not as a charge against current income. The result was to increase earnings in 2015 by 8 %. Ricardo knows that without the change, the earnings would have declined by 2% and the company stock price would have taken a hit. However, he is also very aware of this ethical and prodessional responsibilities.

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 to change the classification from trading to available for sale.

What happened next shocked Ricardo back to reality. The conversation betwn Baitz and Ricardo went this way:

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

"What do you mean?"

"You agreed that we could record $1million 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."

Ricardo remembered all too well. It almost cost the firm the Juggyfroot account. "Are you going to throw that in my face?"

"No, Ricardo. Just a gentle reminder that you had agreed to go along with what we had asked at that time. We expect you to be loyal to our interest here as well."

Meeting broke up when Baitz received a confidential phone call. They agreed to continue the meeting first thing in the morning.

Questions

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?

How would you handle the issue if you were in Ricardos position? Develop an action plan to get your point of view across. What would you say? What do you expect the objections or pushback will be? How would you convince Baitz of the rightness of your position?