Enron What Happened

10876 Words Jan 10th, 2011 44 Pages
Journal of Accounting and Public Policy 21 (2002) 105–127 www.elsevier.com/locate/jaccpubpol

Enron: what happened and what we can learn from it
George J. Benston *, Al L. Hartgraves
Goizueta Business School, Emory University, 1300 Clifton Road, Atlanta, GA 30322-2710, USA

Abstract Enron’s accounting for its non-consolidated special-purpose entities (SPEs), sales of its own stock and other assets to the SPEs, and mark-ups of investments to fair value substantially inflated its reported revenue, net income, and stockholders’ equity, and possibly understated its liabilities. We delineate six accounting and auditing issues, for which we describe, analyze, and indicate the effect on Enron’s financial statements of their complicated
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4 The Chairman of the Securities and Exchange Commission (SEC), Harvey Pitt, has called for the creation of a new oversight body to regulate and discipline CPAs. The SEC, the Financial Accounting Standards Board (FASB), and the American Institute of CPAs (AICPA) have been severely criticized for not having clarified the GAAP rules relating to special-purpose entities (SPEs, thinly capitalized and presumably independently owned and managed enterprises created to serve the business interests of their sponsor), the vehicle associated with Enron’s accounting restatements of its financial statements. Critics have emphasized that,

Texaco, Inc., which went bankrupt in April 1997 with assets of $35.9 billion, was the next largest. 3 Powers was not previously a member of the Enron board of directors. One committee member, Herbert S. Winokur, Jr., was a member during the period in question, and the third member, Raymond S. Troubh, a New-York-based financial consultant, was not a member of the board. Powers and Troubh were added to Enron’s board. 4 Andersen’s initial settlement offer for those claims was reported to be in the range of $700 million to $800 million. This offer was subsequently reduced by as much as fifty percent.

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G.J. Benston, A.L. Hartgraves / J. Accounting and Public Policy 21 (2002) 105–127

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in 2000, Andersen was paid $25 million in audit fees and $27 million for nonaudit consulting. 5 This observation has given new impetus to demands that CPAs be

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