Enron Corporation was a darling in the energy-provider arena, and in January 2001 its stock prices rose above $100 per share. A collapse of investor confidence in 2001 and revelations of accounting fraud led to one of the largest bankruptcies in U.S. history. By the end of the year, Enrons stock price had plummeted to less than $1 per share. Investigations and lawsuits followed. One problem area concerned transactions with related parties that were not adequately disclosed in the companys financial statements. Critics stated that the lack of information about these transactions made it difficult for analysis following Enron to identify problems the company was experiencing.

Companies are often under pressure to meet or beat Wall Street earnings projections in order to increase stock prices and also to increase the value of stock options. Some resort to earnings management practices to artificially create desired results.

Required:

Obtain the relevant authoritative literature on related-party transactions using the FASB Accounting Standards Codification at the FASB website (www.fasb.orgLinks to an external site.). What is the specific citation that outlines the required information on related-party disclosures that must be included in the notes to the financial statements?

Describe the disclosures required for related-party transactions. How could related party transactions be used to engage in earnings management?

Use EDGAR (www.sec.govLinks to an external site.) or another method to locate the December 31, 2000, financial statements of Enron. Search for related-party disclosure. Briefly describe the relationship central to the various transactions described.

Why is it important that companies disclose related-party transactions? Use the Enron disclosure of the sale of dark fiber inventory in your answer.

What are the ethical implications of ENRON engaging in earnings management through related-party transactions?