Please help me paraphrase these paragraphs below !

Remarks : u can ignore the Chinese parts ! Thanks

Enrons 2000 annual report stated that it has metamorphosed() from an asset-based pipeline and power generating company to a marketing and logistics company whose biggest assets are its well-established business approach and its innovative people.

()

Enrons metamorphosis seemed to pay off: In 2000 it was the seventh largest company on the Fortune 500, with assets of $65 billion and sales revenues of $100 billion. From 1996 to 2000 Enrons revenues had increased by more than 750 percent and 65 percent per year, which was unprecedented() in any industry. Yet just a year later, Enron filed for bankruptcy, and billions of shareholder and retirement savings dollars were lost.

(7)

At Enron, executives had incentives to achieve high-revenue growth because their salary increases and cash bonus amounts were linked to reported revenues. In the proxy() statement filed in 1997, Enron wrote the based salaries are targeted at the median of a competitor group that includes peer group companies ... and general industry companies similar in size to Enron. In the proxy statement filed in 2001, Enron wrote, The [compensation] committee determined the amount of the annual incentive award taking into consideration the competitive pay level for a CEO of a company with comparable revenue size and competitive bonus levels for CEOs in specific high performing companies.

(1997/2001bonus)

Employees also had incentives to achieve high revenues and earnings targets because of the shares of stock they held. Enron made significant use of stock options () as a further means of providing incentives for its executives to achieve growth. For example, Enron noted in its 2001 proxy statement that the following stock option awards would become exercisable as of February 15, 2001: 5,285,542 shares for Chairman Ken Lay; 824,038 shares for President Jeffrey Skilling, and 12,611, 385 shares for all officers and directors combined. In fact, as of December 31, 2000, Enron had dedicated 96 million of its outstanding shares (almost 13 percent of its common shares outstanding) to stock option plans.

(stock option)

Enrons performance review committee (hereafter, PRC) determined the salaries and bonuses of employees on a semiannual basis. The PRC was initially instituted in the gas services business during the early 1990s after the merger between Houston Natural Gas and InterNorth. One Enron employee said, At the time, it was a great tool ... When we started the ranking process, we were trying to weed out() the lower 5 or 6 percent of the company. We had some old dinosaurs, and we had some younger people who needed incentives. The PRC was gradually instituted companywide when Jeffrey Skilling, a former McKinsey & Co. consultant who joined Enron in 1990 as the chief executive of the Enron finance division, was promoted to president and COO.

(PRC)

The PRC made its determinations based on feedback reports that assessed the performance of employees on a scale from 1 to 5. Those who received ratings of 1 received large bonuses, and a rating of 2 or 3 could cost a vice president a six-figure sum. Those who ranked in the bottom 10 percent of the review had until the next semiannual review to improve or they would be fired. Those in categories 2 and 3 were also given notice that they could be fired within the next year. During the 1990s Enron made significant changes to several of its accounting procedures designed to improve reported earnings and financial position. For example, Enron began using mark-to-market (MTM) accounting for its trading business, which allowed the present value of a stream of future inflows and outflows under a contract to be recognized as revenues and expenses, respectively(), once the contract was signed.

(PRC102/3)

Enron was the first company outside the financial services industry to use MTM accounting. Enron also began establishing several special- purpose entities (SPE), which were formed to accomplish specific tasks such as building gas pipelines. If an SPE satisfied certain conditions, it did not have to be consolidated() with the financial statements of the sponsoring company. This SPE could be utilized by a company hoping to achieve certain accounting purposes, such as hiding debt.

(SPE)

You should access the PCAOBs Auditing Standard No.5 (AS 5) in http://www.pcaobus.org/Standards/index.aspx to answer the following questions:

1. Read Paragraphs 21 to 25 of AS 5, then

a. Define what is meant by control environment in AS 5.

This consists of actions, policies, and procedures that reflect the overall attitude of the top management, directors, and owners of a client about internal control and its importance.

Because of its importance to effective internal control over financial reporting, the auditor must evaluate the control environment at the company. As part of evaluating the control environment, the auditor should assess -

Whether management's philosophy and operating style promote effective internal control over financial reporting;

Whether sound integrity and ethical values, particularly of top management, are developed and understood; and

Whether the Board or audit committee understands and exercises oversight responsibility over financial reporting and internal control.

b. Comment on your understanding of Enrons control environment.

Enron made significant use of stock options as a further means of providing incentives for its executives to achieve growth. Besides, PRC system was used to evaluate employees performance to make sure not only they had fulfilled Commitment to competence but to power them to achieve growth, to increase the revenue.

c. Explain how Enrons control environment would affect your implementation of the Top-Down approach for Obtaining an Understanding of ICFR and Identifying Controls to Test.

The top-down approach describes the auditor's sequential thought process in identifying risks and the controls to test, and directs the auditor's attention to accounts, disclosures, and assertions that present a reasonable possibility of material misstatement to the financial statements and related disclosures. However, Enron set up special- purpose entities (SPE) that did not have to be consolidated with the financial statements of the sponsoring company if it satisfied specific condition, which may blocked off auditors to conduct the top-down approach process.

2. Read Paragraphs 62 to 70, then

a. Explain whether Enrons executive incentive scheme might be a material weakness, significant deficiency, or insignificant deficiency in internal control. State all your assumptions and support your arguments.

Insignificant deficiency, which the level of detail and degree of assurance that satisfy prudent officials in the conduct of their own affairs that they have reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in conformity with generally accepted accounting principles. While, since the executive incentive scheme did not affect directly to financial statement, total transactions or accounts balance, it shouldnt be regarded significant.

b. Explain whether Enrons performance review scheme might be a material weakness, significant deficiency, or insignificant deficiency in internal control. State all your assumptions and support your arguments.

Material weakness, since this might prevent prudent officials in the conduct of their own affairs from concluding that they have reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in conformity with generally accepted accounting principles Performance review scheme may attract potential to fraud, or even cause material misstatement of financial statements. Therefore, this should be classify as material weakness.

c. Explain whether Enrons accounting procedures relating to MTM and SPE might be material weaknesses, significant deficiencies, or insignificant deficiencies in internal control. State all your assumptions and support your arguments.

Significant deficiencies, judged by the statement the level of detail and degree of assurance that satisfy prudent officials in the conduct of their own affairs that they have reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements in conformity with generally accepted accounting principles. However, MTM allowed the present value of a stream of future inflows and outflows under a contract to be recognized as revenues and expenses, and SPE could be utilized by a company hoping to achieve certain accounting purposes, such as hiding debt. They both have the possibility to influence the transaction, account or financial statement and cause fraud, which should be seen as significant.