Enron: Fraud, Deception, and the Aftermath (Course Id 212)

Accounting - Accounting for Course Id 212

This course satisfies the CA Boards 8 hour fraud requirement in 87(d) of the CBA Regulations which states: Licensees who are subject to the accounting and auditing (A&A) or government CE requirement will need to complete an additional eight hours of fraud CE specifically related to the detection and/or reporting of fraud in financial statements.

Text - Technical - NASBA Registry - 212

Secion II
Accounting Issues

• Outline the GAAP rules that existed at the time of Enron, as they relate to investments, special purpose entities (SPEs) and consolidations;
• Compare and contrast the three tiers of ownership of outstanding voting stock and their accounting treatment;
• Categorize the three types of securities and the accounting treatment within the categories under FASB No. 115;
• Identify when the equity method should be used;
• Name the general rule for consolidation under ARB 51;
• Explain the SEC’s position on consolidation;
• List the factors that the registrant should consider in determining the most meaningful presentation in deciding upon consolidation policy;
• Provide examples of when to use combined financial statements;
• Delineate the basic rules that must be followed when presenting combined financial statements;
• Name the exceptions to the more than 50% ownership test of ARB No. 51;
• Define the term “special purpose entity”;
• Trace the steps that were usually taken by an SPE;
• Name the advantages of using SPEs under the previous rules in effect during Enron;
• Describe the three general criteria for non-consolidation;
• Summarize the special rules for SPEs involved in leasing transactions;
• Explain the rules for SPEs when there was a transfer of financial assets and liabilities;
• Identify the rule for balance sheet classification of notes receivable in connection with the issuance of equity and paid-in capital; and
• Name the rule regarding companies recording income and gains on their own stock.

Secion III
Enron and GAAP Violations

• Trace the development of Enron’s mishandling of SPEs;
• Explain the various way that Enron violated the three non-consolidation criteria for SPEs;
• Draw and outline the basic structures of Enron’s SPEs;
• Delineate the events of each phase of the first Enron SPE, JEDI and Chewco Investments L.P.;
• Name the GAAP violations that occurred during each phase of JEDI-Chewco;
• Explain the outcomes of JEDI-Chewco and its GAAP violations;
• Recognize the other GAAP issues related to Chewco and JEDI;
• List the events of each phase of the LJM1 partnership;
• Recognize the GAAP violations that occurred during each phase of LJM1 and Swap Sub;
• Name the events of each phase of LJM2 and the Raptors;
• Identify the GAAP violations that occurred during each phase of LJM2 and the Raptors;
• Explain how the LJM partnerships mishandled other transactions;
• Delineate how several employees were personally enriched at the expense of Enron;
• Identify the restatements that Enron made in November 2001;
• Trace the demise of Enron following the announcement of the restatements;
• Illustrate Enron’s disclosure deficiencies;
• Describe the existing GAAP requirements for related party transactions;

o Delineate the general rules for disclosing related party transactions;
o Name the SEC rules for related party transactions; and

• Discern whether or not Enron satisfied the GAAP and SEC disclosure requirements;

Secion IV
Enron’s Board of Directors and Audit Committee

• Summarize the background for boards of directors and audit committees;

o State some obvious symptoms that existed in companies that committed fraud;
o Describe the SEC’s rules related to audit committees provided in Audit Committee Disclosure;
o Identify the changes that were made to Audit Committee Disclosure;

• Determine whether Enron’s board of directors was independent of management;
• Explain the breakdown in internal control;
• Identify the specific roles of Enron’s board of directors;
• Delineate the specific roles of Enron’s audit and compliance committee;
• List the specific roles of members of Enron’s senior management; and
• Explain the specific roles of Arthur Anderson.

Secion V
Auditing, Independence and Conflicts of Interest

• Differentiate between the authority provided for fraud and illegal acts;
• Explain how Enron’s audits identified some signs of fraud;
• Name the problems that were associated with independence and conflicts of interest between Anderson, Enron and the Big Five;
• Recognize what portion of the Big Five’s revenue was derived from non-audit services;
• Discern whether there is any correlation between the receipt of large consulting fees and the quality of the audit;
• Trace the SEC’s attempt to change the independence rules;
• Provide examples of the problems with conflicts of interest among the financial analysts community; and
• Outline the new rules that the Sarbanes-Oxley Act requires of analysts and investment bankers.

Secion VI
Changes After Enron

• Categorize the major changes that have been made and will be made as a direct result of Enron;
• Outline the changes that Harvey Pitt made to Congress;
• Explain the general changes that the Sarbanes-Oxley Act of 2002 made;
• Provide details about the makeup of the Public Company Accounting Oversight Board (PCAOB);
• Identify how the Sarbanes-Oxley Act affects SEC auditors;
• Recognize how the Sarbanes-Oxley Act changes the conflicts of interest and auditor independence rules;
• Describe how the Sarbanes-Oxley Act affects boards of directors and audit committees;
• Illustrate how the Sarbanes-Oxley Act affects corporate officers;
• List the new corporate disclosures required by the Sarbanes-Oxley Act;
• Determine the punishments for various violations;
• Explain the revised rules for investment bankers and analysts;
• Recognize other provisions of the Sarbanes-Oxley Act;
• Illustrate the trickle down effect of the Sarbanes-Oxley Act;
• Identify results of the GAO’s Mandated Study on Consolidation and Competition in the Accounting Profession;
• List the recommended changes for FASB;
• Explicate Enron’s impact on a principles-based accounting system;
• Compare a rules-based system of accounting to a principles-based accounting system;
• List advantages and disadvantages of both a rules-based system and a principles-based system;
• Explain Enron’s impact on the change in the SPE rules (i.e., FASB Interpretation No. 46R);
• Define a “variable interest entity”;
• Categorize and describe off-balance sheet entities;
• Apply and explain the rules of FASB Interpretation No. 46R;
• Name the three basic rules for consolidation;

o Determine whether there is a variable interest entity;
o Establish whether an entity or individual has variable interests in the VIE;
o Resolve the issue of the primary beneficiary;

• Define the term “variable interest”;
• Provide examples of variable interests;
• Define the term “primary beneficiary:’
• Follow the rules to determine who the primary beneficiary of the VIE is;
• Outline the related-party rules for primary beneficiaries;
• Explain the operating lease issue;
• Follow the rules for initial testing and measuring of the VIE by the primary beneficiary;
• Recognize the effective date and transition requirements of Interpretation No. 46R for public entities and non-public entities;
• Describe the ongoing changes being made in Congress to pensions and 401(k) plans;
• List reasons why individuals would choose to not serve as a board member or on a company’s audit committee;
• Illustrate the new post-Sarbanes environment for directors;
• Provide examples of possible claims against directors and officers;
• Explain the issue of D&O insurance;
• List the three areas of D&O insurance coverage;
• Recognize the effect of higher malpractice insurance rates and higher audit fees;
• Identify how the cost of section 404 of Sarbanes-Oxley compliance is exceeding estimates;
• Outline reasons why European companies are delisting from the U.S. exchanges and why smaller companies are going private; and
• Explain the effect that the Enron scandal has had on the accounting profession.