Ethics Case

Harding 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, 2014, is greater than total cost. Some securities have increased in value and others have decreased. Ann Bales, the financial vice president, and Kim Reeble, the controller, are in the process of classifying for the first time the securities in the portfolio.

Bales 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 2014 net income.

Reeble 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. Reeble 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.

Instructions

(a)

Will classifying the securities as Bales and Reeble suggest actually affect earnings as each says it will?

(b)

Is there anything unethical in what Bales and Reeble propose? Who are the stakeholders affected by their proposals?

(c)

Assume that Bales and Reeble properly classify the portfolio. At year-end, Bales proposes to sell the securities that will increase 2014 net income, and that Reeble proposes to sell the securities that will decrease 2014 net income. Is this unethical?

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