The relationship between successful organizations is changing. In some cases, competitors even combine efforts to jointly develop new products. In other situations, companies license their products to other companies.

Required

a. What is a related-entity transaction? What distinguishes a licensing transaction from a related-entity transaction? For example, Merck licenses Proctor & Gamble to sell all Prilosec OTC drugs because Proctor & Gamble has greater knowledge in how to market to the consumer. Is the license a related-entity transaction? If not, why not?

b. How would the auditor normally find out about licensing transactions, joint venture transactions, and Special Purpose Entity transactions?

c. Explain why the Special Purpose Entities and the transactions that were entered into with those entities by Enron violated GAAP? What would have been the proper accounting for those transactions?