Table of ContentsLearning Objectives.......................................................................................................................1

I. Enron Case: Fraud, Deception and the Aftermath ...............................................................5

II: Accounting Issues ....................................................................................................................7Overview of GAAP Rules for Investments, Consolidations and SPEs ...................................9

Tier 1: Investments with Less Than 20% Ownership in the Voting Stock ......................10Tier 2: Investments Accounted For Using the Equity Method ........................................11Tier 3: Consolidations and Combined Statements ............................................................12Exceptions to the More Than 50% Ownership Test- Consolidations ..............................16 Exception 1: Entities Controlled by Contract ................................................................17 Exception 2: General Partner in a Limited Partnership ..............................................18 Exception 3: Miscellaneous Transactions involving Research and Development Arrangements and Rabbi Trusts ...................................................................................19 Exception 4: The Variable Interest Entity (VIE) Rules- FIN 46R .............................20

GAAP Authority for SPEs .......................................................................................................23Special Rules for SPEs Involved in leasing transactions .................................................25The 3% Rule ......................................................................................................................26Rules for SPEs When There is a Transfer of Financial Assets and Liabilities ...............27

Other GAAP Issues .................................................................................................................28Review Questions and Suggested Solutions ..............................................................................31

III. Enron and GAAP Violations ...............................................................................................39Enron’s Use of SPEs- Where Did They Violate the GAAP Rules ........................................39

Enron and the Three SPE Criteria for Non-consolidation ................................................41The Second SPEs- the LJM Partnerships ........................................................................56LJM 1 .................................................................................................................................57LJM 2 .................................................................................................................................65

Results of the SPEs .................................................................................................................76Enron’s Disclosures .................................................................................................................79Existing GAAP Requirements for Related Party Transactions ..............................................79

Review Questions and Suggested Solutions ..............................................................................91

IV: Enron’s Board of Directors and Audit Committee ..........................................................97Background.................................................................... ..........................................................97Enron's Board and Audit Committee.............................. ........................................................98

Review Questions and Suggested Solutions ............................................................................105

V: Auditing, Independence and Confl icts of Interest ...........................................................109Background........................................................................ .....................................................109Enron and The Audit.......................................................... ....................................................109Independence and Confl icts of Interest .................................................................................110The SEC's Attempt to Change the Independence Rules.... ..................................................111Other Confl icts of Interest .....................................................................................................113

Review Questions and Suggested Solutions ............................................................................117

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Lessons from Enron: The Deceptionand Aftermath

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VI: Changes After Enron ........................................................................................................121Introduction.................................................................................. ..........................................121SEC Changes .........................................................................................................................122The Sarbanes-Oxley Act of 2002 ..........................................................................................123FASB's Rapid - Fire Accounting Changes ............................................................................138FASB Interpretation No. 46R Consolidation of Variable Interest Entities ..........................143Various Changes From Enron ...............................................................................................162

Review Questions and Suggested Solutions ............................................................................177

Exhibit 1 The Sarbanes-Oxley Act of 2002-Key Provisions .................................................187

Glossary.......................................................................................................... .............................195

Final Examination Questions........................................................................ ............................197