Enron engaged in a neat trick to improve its financial statements. It simply removed debt from them and transferred it to partnerships. The company remained liable for the debt, however, and when the partnerships failed to pay the debt, Enron became liable for it.
a. Why is it a problem for a company to keep debt off its balance sheet to make its financial statements look better? Who is harmed when this happened? Why would outsiders care?
b. What fraud risk factors were present in this company? How should the auditors gather information related to the fraud risk factors you identified?
c. As an auditor, when your client is engaged in a transaction that you do not understand, what should you do?
d. What role do you think the corporate culture at Enron played in the fraud?
e. Arthur Andersen lost its license to audit public companies as a result of its felony conviction related to the Enron audit (it was later overturned). Was the decision to take its license fair? If you had planned to issue stock for your company the year following the Enron fraud and the court decision on Arthur Andersen, would you have been willing to have Arthur Andersen audit the company?
f. Should the worldwide operation of an accounting firm suffer from the actions of one partner? Explain your answer.