Grade 12 Accounting

6-2b

chapter 7 questions

Accounting Issue: Arthur Andersen’

By: Paul Huynh and Sophia Truong

• Arthur Andersen was charged with obstructing justice for shredding and erasing information from documents relating to the audit of Enron
• Later, investigations also found that a memo relating to Enron’s loss was also altered
• David Duncan, partner of Arthur Andersen, and Nancy Temple, Arthur Andersen’s lawyer, were major players in the Arthur Andersen scandal
  • David Duncan, who was the Andersen partner overseeing the Enron audit, pleaded guilty to the obstruction of justice, however he testified that an email from Nancy Temple, an Arthur Andersen lawyer, had influenced his decision to shred the documents
  • There was an email from Temple to Duncan to delete Andersen’s objection to the use of “non-recurring” by Enron on its loss
  • From when Arthur Andersen was first charged with obstruction of justice, the clients started leaving to find other accounting firms
  • On April 9, 2002, Duncan admitted to the shredding and erasing of the documents and pleaded guilty to obstruction of justice at court
  • Arthur Andersen was found guilty of obstruction of justice on the 15^th of June, 2002 and the jury made their decision based on the destruction and altering of documents and also the omission of Duncan’s disagreement to the information on documents about Enron’s losses
  • On October 16, 2002, the Arthur Andersen firm was fined $500 000 and given five years probation
  • Arthur Andersen had stopped auditing public clients as of August 31, 2002
  • As of 2011, Arthur Andersen has not been dissolved and has not declared bankruptcy, however does not exist as an accounting entity anymore
  • The ownership of this firm has been left to four individual partners, who have created limited liability corporations
  • Impact on Accounting
    • New audit rules were made:
      • Statement on auditing standards 112
      • There was the enactment of Sarbanes – Oxley
        • Prohibits the knowing destruction of documents that relate to jurisdiction of any department or agency of the United States
    • The reputation of accounting is less reliable
    • Future outlook of accounting
      • More auditing rules will probably be made to decrease the possibility of manipulation of the books of companies, and to try to keep the accounting reputation from being more tarnished

Citation

Fox, L. (2003). Enron: The Rise and Fall. Hoboken, New Jersey: John Wiley & Sons, Inc.

Toffler, B. L., & Reingold, J. (2003). Final Accounting: ambition, greed, and the fall of Arthur Andersen. New York, NY: Broadway Books a division of Random House, Inc.

Squires, S. (2003). Inside Arthur Andersen: shifting values, unexpected consequences. Upper Saddle River, New Jersey: Pearson Education, Inc.

Sachdev, A. (2003, May 22). Conference center last resort for Andersen. Chicago Tribune.
Retrieved March 4, 2011, from Chicago Tribune archive
< http://www.chicagotribune.com/business/chi-0305220361may22,0,7603044.story&gt;

Thomas, C. B. (2002, June 18). Called to Account. Time.
Retrieved March 4, 2011, from Time archive
< http://www.time.com/time/business/article/0,8599,263006,00.html&gt;

Carpenter, D. (2002, June 28). Arthur Andersen At Center Of Scandal Again.
Retrieved March 4, 2011, from CRN databases
< http://www.crn.com/news/channel-programs/18828554/arthur-andersen-at-center-of-scandal-again.htm;jsessionid=eFRhXioQgjVU1vrTQTTISA**.ecappj01&gt;

Kyle, R. H., (2005, September). Lessons Learned From The Arthur Andersen Case.
Retrieved March 7, 2011, from
< http://www.fredlaw.com/articles/whitecollar/whit_0509_rhk.html&gt;

Enron Scandal – What Went Wrong?

By: Rita Chen and Sahana Sellathurai

 

Enron Scandal

–          an energy company at Houston, Texas

–          was formed in 1985 and merged with InterNorth

–          was one of the world’s leading electricity, natural gas, communications and pulp and paper companies

–          from 1996 – 2000, Enron was named “America’s most innovative Company” by Fortune magazine

–          had claimed revenues of $101 billion dollars in 2000

–          Overstated revenues by 1.2 billion dollars

–          One of the biggest audit failures ever

–          One of the Big 5 auditing companies, Arthur Andersen also collapsed

–          Tried to destroy/shred documents showing evidence of bad auditing and carelessness

 

Timeline

1985

–          Kenneth Lay and Sam F. Segnar merge Houston Natural Gas and InterNorth (more than 37 000 miles of pipeline).

 

1989

–          They begin trading natural gas commodities. Later become the largest natural gas merchant in North America and branch out into trading other commodities such as water, coal and steel.

 

2000

–          Launch EnronCredit.com – buys and sells credit risk to help companies manage the risk in trading.

–          Enron stock peaks at a record high of $90/share

 

2001

–          Report a third-quarter loss of about $640 million

–          Securities and Exchange Commission starts a formal investigation.

–          Enron accounts losses of $586 million

–          Enron files for Chapter 11 bankruptcy protection (more than 4000 workers will be laid off

 

2002

–          The U.S. Justice Department verifies that it has begun a criminal investigation on Enron’s bankruptcy

–          Former Enron auditor Arthur Anderson indicted for obstruction of justice fr destroying Enron-related documents

–          David Duncan, Arthur Andersen’s former top Enron auditor pleads guilty to obstruction of justice

–          Andersen was sentenced to probation and banned from auditing public companies

 

2003

–          Enron announces that it will emerge from bankruptcy as 2 sepearate companies with different names

–          Enron files its bankruptcy reorganization plan and says that most creditors will receive about 1/5 of the estimated $67 million that they owe

 

2004

–          Initial approval of Enron’s plan for bankruptcy reorganization ( creditors would receive $11 billion in cash and stocks)

–          Andrew and Lea Fastow plead guilty

–          Andrew: 10 year prison sentence, forfeit $23.8 million

 

2005

–          Enron broadband trial begins

–          Overturn the conviction of the Arthur Andersen accounting firm

 

2007

–          Enron completes sale of shareholding in to Ashmore Energy International

–          Enron changes corporate name to Enron Creditors Recovery Corporation (doing business as Enron Corporation)

People Involved

Andrew Fastow

–          Former CFO

–          Created Special Purpose Entities to hide debts

–          Sentenced to 6 years in jail in 2006

–          Wife also sentenced to 12 months in jail for filing false tax returns

 

Kenneth Lay

–          Former CEO of Houston Natural Gas

–          Became CEO of Enron and chairman a year later

–          Found guilty of 6 counts of conspiracy and fraud

–          Before he could be sentenced he died of a heart attack in 2006

Jeff Skilling

–          Former president and chief operating officer

–          Driving force behind turning Enron from a natural gas pipeline company into energy trading powerhouse

–          Became CEO for only 6 months before resigning in August 2001 and selling all of his shares

–          Sentenced in 2006 to 24 years, 6months in jail

 

Mark to Market Accounting

–          Instead of going by the cost principle, assets were valued at their market price

–          Assets were vastly overstated

–          There were fewer standards for energy so market value was hard to control and determine

Special Purpose Entities

–          Entity created by a company for special purposes

–          Could be used to transfer debts outside of the company and would not show up on the balance sheet

–          Used by Andrew Fastow to conceal debts

–          Used shares as collateral or compensation for companies who faced risks

–          Andrew Fastow used it for debts and assets that were quickly decreasing in value

 

Impact on Accounting Profession

Sarbanes –Oxley Act of 2002

–          put in place after the Enron scandal

–          purpose is to prevent big companies from committing accounting fraud

–          gives more power to consumers by forcing publicly traded companies to disclose everything to their shareholders

–          increases/creating prison time for scandals

 

Public Company Oversight

–          created to take over the task of regulating the profession from its members

–          new regulations that require CFOs and CEOs to sign statements proving to the accuracy of their financial records

–          it restricted public accounting firms from providing any non-auditing services when auditing

–         

Changes in the Stock Exchange

–SEC called for changes in the stock exchanges’ regulations

–New York Stock Exchange declared a new governance proposal

Provision includes:

–          all firms must have a majority of independent directors

–          all audit committee members should be financially literate

–          at least one member of the audit committee should have accounting or related financial management expertise.

–          in addition to regular sessions, the board is required to have extra sessions without management

http://www.youtube.com/watch?v=saBOAGzAY9E

 

Works Cited

“Accounting for Special Purpose Entities Revised: FASB Interpretation 46(R).” NYSSCPA.ORG | The Web Site of the New York State Society of CPAs. Web. 10 Mar. 2011. <http://www.nysscpa.org/cpajournal/2004/704/essentials/p30.htm&gt;.

“Enron: Companies.” Lycos. Web. 10 Mar. 2011. <http://www.lycos.com/info/enron–companies.html&gt;.

“Enron Timeline.” AGSM MBA & AGSM Executive Programs – Australian School of Business – UNSW. Web. 10 Mar. 2011. <http://www.agsm.edu.au/bobm/teaching/BE/Enron/timeline.html&gt;.

The Sarbanes-Oxley Act 2002. Web. 10 Mar. 2011. <http://www.soxlaw.com/&gt;.

“CBC News Indepth: Enron.” CBC.ca – Canadian News Sports Entertainment Kids Docs Radio TV. Web. 11 Mar. 2011. <http://www.cbc.ca/news/background/enron/&gt;.

Cunningham, By. “ENRON AND ARTHUR ADNDERSEN: THE CASE OF THE CROOKED E AND THE FALLEN A – Global Perspectives on Accounting Education Articles | Find Articles at CBS MoneyWatch.com.” Find Articles at BNET | News Articles, Magazine Back Issues & Reference Articles on All Topics. Web. 11 Mar. 2011. <http://findarticles.com/p/articles/mi_qa5524/is_200601/ai_n21393163/?tag=content;col1&gt;.

“How Fastow Helped Enron Fall – TIME.” Breaking News, Analysis, Politics, Blogs, News Photos, Video, Tech Reviews – TIME.com. Web. 11 Mar. 2011. <http://www.time.com/time/business/article/0,8599,201871-1,00.html&gt;.

“Enron’s Collapse: The Fall Of A Wall Street Darling.” Investopedia.com – Your Source For Investing Education. Web. 11 Mar. 2011. <http://www.investopedia.com/articles/stocks/09/enron-collapse.asp&gt;.

Thomas, C. William. “The Rise and Fall of Enron.” Journal of Accountancy. Web. 11 Mar. 2011. <http://www.journalofaccountancy.com/Issues/2002/Apr/TheRiseAndFallOfEnron.htm&gt;.

Long, Scott. “TransActions.” GDS Associates, Inc. Web. 11 Mar. 2011. <http://www.gdsassociates.com/news/transactions/vol202.html&gt;.

“Enron Corp. – Timeline of the Rise and Fall of Enron Corp. | Chron.com – Houston Chronicle.”Houston News, Entertainment, Search and Shopping | Chron.com – Houston Chronicle. Web. 11 Mar. 2011. <http://www.chron.com/news/specials/enron/timeline.html&gt;.

Fox, Loren. Enron: the Rise and Fall. Hoboken, NJ: Wiley, 2003. Print.

Dumortier, By Alex. “Mark-to-Market Accounting Basics.” Fool.com: Stock Investing Advice | Stock Research. Web. 11 Mar. 2011. <http://www.fool.com/investing/dividends-income/2008/10/02/mark-to-market-accounting-what-you-should-know.aspx&gt;.

 

Here are the Review Answers for questions 4-6B and 5-12A which I really hope are the questions I assigned you.  If they aren’t, someone email be and I’ll try to post the correct answers.

Main Points Summary

The five main topics we covered in chapters 4 and 5 are:
1)    Adjustments
2)    Accounts Involved in Adjustments
3)    The Closing Process
4)    The Worksheet
5)    Classification Groups

Adjustments

Adjustments are done at the end of an accounting period to recognize internal transactions and bring asset and liability accounts to their proper balances after all transactions for an accounting period. It is based on the revenue recognition principle and the matching principle.

There are five different types of adjusting entries:
-Adjustments for Prepaid Expenses
-Adjustments for Amortization
-Adjustments for Unearned Revenues
-Adjustments for Accrued Expenses
-Adjustments for Accrued Revenues

Accounts Involved in Adjustments

Prepaid Expenses refers to the use of assets paid for in advance such as insurance or rent (debit expense, credit asset). Amortization adjustments are done to record the usage of a capital (long-term) assets life (debit expense, credit asset). Unearned Revenue is adjusted to recognize revenues earned (debit unearned revenue, credit revenue). Accrued Expenses are adjusted to recognize unrecorded and unpaid expenses (debit expense, credit liability). Lastly, Accrued Revenues are adjusted to recognize unrecorded and not yet received revenues (debit asset, credit revenue).

The Closing Process

After financial statements are completed, the closing process begins. The main function of the closing process is to ensure that the account is ready for the next fiscal period. The owner’s equity should reflect the revenue, expense and withdrawals accounts. In order to measure results from the period that has just ended, those accounts should begin with balances set at zero. Additionally, the increases that come from the net income should reflect the capital account of the owner. The decreases due to the net losses and withdrawals should also be shown in the owner’s capital account. Most accounts involved in the closing process are known as Temporary or Nominal Accounts, these accounts are the Revenue, Expense, Withdrawals and Income Summary accounts. These accounts are closed, with the balances brought to zero at the end of every fiscal period.

Process of closing:
-Close Revenue accounts into Income Summary (Debit = Revenue, Credit = Income Summary)
-Close Expense accounts into Income Summary (Debit = Income Summary, Credit = Income Summary)
-Close Income Summary account into Owner’s Capital account (Credits and Debits depend on Net Income / Net Loss)
-Close Withdrawals account into Owner’s Capital account (Debit = Capital, Credit = Drawings)

The Worksheet

The worksheet is used to to prepare for the creation of financial statements, such as the Income Statement, the Statement of Owner’s Equity, and the Balance Sheet. The worksheet contains five different sections for the Unadjusted Trial Balance, the Adjustments, the Adjusted Trial Balance, the Income Statement, and the Balance Sheet / Statement of Owners Equity. Every account can be listed onto the worksheet. Figures are all recorded into the Trial Balance sections before being moved over to their appropriate sections. Revenues and Expenses to the Income Statement section and Assets, Liabilities, and Owner’s Capital and Withdrawal into the Balance Sheet section. The Net Income / Loss also appears on the worksheet under the Income Statement and Balance Sheet sections.

Classification Groups

There are three major categories within a classified balance sheet; they are assets, liabilities, and owner’s equity. Within those three, there are multiple sub categories

Assets:
-Current assets (cash, accounts receivable), used within the fiscal period
-Long term investments (stocks, bonds, unused land), last more than one fiscal period
-Plants, property, and equipment (land, buildings, equipment), last more than one fiscal period
-Intangible assets (patents, grants, copyrights, trademarks, goodwill)

Liabilities:
-Current liabilities (accounts payable, notes payable, unearned revenue), paid within a fiscal period
-Long term liabilities (mortgage payable, bank loan), paid over multiple fiscal periods

Owners Equity:
-Capital

How does the unit relate to GAAPs?

In this unit we learn how to do adjustments. When adjusting we recognize the revenue recognition principle and the matching principle. We also learn that accrual basis accounting is founded on the revenue recognition principle, the matching principle and the time period principle.

How does the unit relate to identifying, recording, measuring, and communication information?

We identify what accounts are needed to do the adjustments for the accounting period and the accounts needed for the closing process. Then we record and measure the by using the general journal. Finally we communicate the information by posting post-closing trial balance, and classified balance sheets.

How do the topics covered ensure that accounting information is relevant, reliable, consistent, and comparable?

The GAAPS, which in this case are: matching principle, time period principle and revenue recognition principle ensure that the accounting information is relevant, reliable, consistent and comparable.