Question

A form of financial reporting fraud committed by Enron managers was the shifting of debt from their balance sheets to SPES. True False

Answer 1

Ans: TRUE

Enron Scandal, on of the biggest Bankruptcy in the history of United States that resulted in significant improvements to increase the accuracy of financial reporting in laws and legislation having long lasting repurcussions in the financial world. The most important of those measures, the Sarbanes-Oxley Act (2002), imposed harsh penalties for destroying, altering, or fabricating financial records. The act also prohibited auditing firms from doing any concurrent consulting business for the same clients.

With the increasing competition in the energy business, Enron dealt with heavy pressure from the shareholders to acheive profit that had shrank due to competition. To cope up with this, Enron started practicing suspicious accounting practices such as marked to market accounting that allow company to account for unrealized future gains from from trading contracts in the current income statement reflecting higher profits but in actual it was just an illusion.

Much of the fraud involved Special Purpose Entities (SPEs). Enron used to transfer or dump its troubled or devalued assets to SPEs that helped Enron to keep those troubled assets off the records. And by doing this, they managed to create an illusion that the losses were less severe than they actually were.

This fraud came to the highlight in mid 2001 taking the the stock price of the company plummeted from a high of $90 per share in mid-2000 to less than $1 by the end of November 2001,