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Forensic Accounting > Enron > Flashcards

Enron Flashcards

0
Q

In Enron’s 2000 annual report, how many principal lines of business did Enron have? What line was the company’s largest revenue producer?

A

4 principal lines of business

Energy Wholesale Services ranked the company’s largest
Revenue producer in 2000

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1
Q

During the 1990s, Jeffrey Skilling developed and implemented a plan to transform Enron from a conventional natural gas supplier into…

A

An energy trading company that served as an intermediary

between producers of energy products And end users of those commodities

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2
Q

What fueled the Energy Whole Sale Service division’s 60% increase in transaction volume in 2000?

A

Fueled by rapid development of EnronOnline, electronic

Marketplace for energy industries

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3
Q

Enron’s 4 principal lines of business

A

1 Enron Energy Wholesale Services
2 Enron Energy Services
3 Enron Transportation Services
4 Enron Broadband Services

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4
Q

Enron Energy Services, function

A

Company’s retail operating unit

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5
Q

Enron Transportation Services, function

A

Responsible for company’s pipeline operations

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6
Q

Enron Broadband Services, function

A

New operating unit intended to be an intermediary between

Users and suppliers of broadband internet access services

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7
Q

How were Enron’s executives viewed in 2001?

How large was Enron?

A

As executive superstars who had access to key political
Figures

7th largest firm in USA

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8
Q

Why was Enron criticized during California’s electric utility crisis in 2001?

A

Profiteering by selling electricity at inflicted prices in California

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9
Q

When Enron’s stock price was collapsing, what did it’s executives blame the dropping share price on?

A

Falling natural gas prices

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10
Q

Enron’s Q3 earnings issued in October of 2001

A

Firm suffered a huge loss with a mysterious $1.2 billion reduction
In Enron’s owner’s equity and assets

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11
Q

In Enron’s Q3 earnings in 2001, what caused the $1.2 billion reduction in owners equity and assets? 3 things

A

1 Reversal of previously recorded transactions involving swap of
Enron stock for notes receivable
2 Enron had acquired notes receivable from related third parties
Who had invested in limited partnerships organized/sponsored by
Enron
3 accounting error: notes receivable should not have been
recorded in assets section but reduction in owners equity

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12
Q

Enron’s restatement of reported earnings on November 8th 2001

A

Wiped out $600 million in profits the company had reported over
Previous 5 years

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13
Q

On December 2nd, what did the restatement of earnings cause Enron to do?

What was the loss to stockholders?

A

File for bankruptcy

$60 billion loss to stockholders, largest corporate bankruptcy in
History after Worldcom ($100 billion)

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14
Q

What were the partnerships Enron made transactions with?

A

Special purpose entities (SPEs) AKA SPVs (special purpose vehicles)

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15
Q

Special purpose vehicles (SPVs)

A

Can take several legal forms but are commonly organized as

Limited partnerships

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16
Q

Aggressive accounting: Raptor transactions and Condor Vehicle

A

Enron recognized over $550 million of FMV gains on stocks
Via swaps with Raptor, in which much of the stock declined
significantly

The value of the swaps weren’t there for Raptor, so Enron issued
Stock to offset the losses, Enron hiding losses in related company

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17
Q

Related party footnote

A

Does not adequately explain that entities described are thinly
Capitalized and all the value of the entities comes from underlying
Value of derivatives, Enron stock and N/P

Enron stock, derivatives and N/P are all at big losses and are
What capitalize the related party

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18
Q

What is the underlying motivation for creating an SPE?

A

Debt avoidance

SPEs provide large companies with a mechanism to raise needed
Financing for various purposes without reporting debt on balance
Sheet

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19
Q

SEC and FASB implemented rule for SPEs: 3 percent rule

A

Rule allows company to omit an SPEs assets and liabilities from
It’s consolidated financial statements

As long as parties independent of company provide minimum
Of 3 percent of SPE’s capital

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20
Q

3 percent rule: how large companies use the SPE structure

A

Arrange external parties to provide exactly 3 percent of SPE’s
Total capital

97% was loans of company that created the SPE

21
Q

Critics charged 3 percent rule undercut the fundamental principle
Within the accounting profession that consolidated financial
Statements should be prepared for…

A

Entities controlled by common ownership group

22
Q

In the 90s Companies such as Enron took advantage of minimal legal and accounting guidelines for SPE’s to…

A

Divert huge amounts of liabilities to off balance sheet entities

23
Q

How did Enron use SPE’s other than in financing activities?

Unique because not many companies did this

A

Used SPEs for sole purpose of downloading underperforming
Assets from it’s financial statements to financial statements of
Related but unconsolidated entities

24
Q

How did Enron manufacture paper gains in transactions with SPEs?

A

Enron sold assets at grossly inflated prices to their SPEs

Allowing company to manufacture large paper gains

25
Q

Enron’s disclosures about SPE transactions

A

Nominal, confusing, in cryptic language

26
Q

How were Enron’s profits inflated from SPEs?

A

Profits were inflated by unrealized gains of Enron’s common stock
In SPE transactions

27
Q

What was the primary motivation for Enron’s extensive use of SPEs and related accounting machinations in the 90s?

A

The company’s growing need for capital

28
Q

Enron’s management required reporting impressive financial results to achieve what for the firm? 2 reasons

A

Maintain a high credit rating to convince lenders to keep lending

Maintain a high stock price

29
Q

Loan agreement price triggers (negotiated by Enron)

3 possibilities required when trigger was reached?

A

If stock dropped below designated level (trigger)

Enron was required to provide additional stock to collateralize the
Given loan, make significant payments to the SPE, or restructure
Prior transactions with SPE

30
Q

Worst case scenario for falling below a trigger

A

Enron might be forced to dissolve an SPE and merge its assets
And liabilities into company’s consolidated financial statements

31
Q

If stock price fell to far, what would happen?

A

Losses hidden in SPEs would show up on financial statements

32
Q

Self dealing Windfall profits in SPEs

A

Company officers and friends made as much as $1 million in 60
From investing $5,800

CFO made $30 million

33
Q

Aside from SPEs what other accounting gimmick did Enron use?

A

Abused mark to market accounting method for its Longterm
Contracts involving energy commodities

inflated profits booked on long term contracts by using unrealistic
Price forecasts

34
Q

What did Enron’s corporate culture foster?

A

Rule breaking

35
Q

Through its 15 year tenure what was Anderson’s audit opinion of Enron?

A

Unqualified audit opinion

36
Q

In 2001 what did Anderson’s audit team do to help Enron?

A

Help restructure the company’s SPEs so they could continue to
Qualify as unconsolidated entities

37
Q

What amount and percentage of earnings were restated in 2001, due to Anderson’s 1999 error on a large SPE transaction?

A

$600 million or 20% of prior earnings

38
Q

Violation of 3 percent rule, how did Enron violate this rule?
How should it have been reported due to the violation?

A

1/2 of the SPE’s 3% of equity had been contributed by Enron

Should have been reported on Enron’s consolidated financial
Statements

39
Q

For every $1 of audit fees paid to Anderson, what was paid for consulting fees?

A

$2.69 was paid

For nonaudit consulting fees

40
Q

In 2000, how much did Anderson earn in fees from Enron? How much was from audit?

A

Earned $52 million in fees and $25 million from audit

41
Q

Loss leader

A

Use of independent auditing to get in the door for company to
Sell more profitable consulting contracts

42
Q

Anderson was criticized with helping Enron in its…

A

SPE transactions

43
Q

2 major ways Anderson failed to fulfill its professional responsibilities in connection with its audits of Enron’s financial statements

A

1 bring attention to Enron’s Board or Audit and compliance
committee

2 address concerns about Enron’s internal controls over
Party related SPE transactions

44
Q

SEC fines and Anderson

A

Anderson paid $75 million in fines to the SEC in the 90s

For shoddy auditing work

45
Q

The role of independent auditors, what it isn’t

A

Does not include making business judgements for clients

46
Q

The role of independent auditors, what it is

A

Auditors have responsibility to provide an objective point of view

Regarding proper accounting and financial reporting decisions
For those judgements

47
Q

In January 2002, Anderson’s Houston office commit obstruction of justice?

A

They were caught shredding a number of significant documents

48
Q

FASB imposed stricter accounting and financial reporting guidelines on SPEs

A

Companies must include financial data for SPEs in consolidated financial statements

49
Q

New agency created after Enron fiasco, their function?

A

Public Company Accounting Oversight Board

Oversee rule making process of independent audit function

50
Q

An audit firm cannot force a client to adhere to…

A

A higher standard

Forensic Accounting (10 decks)

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