Question

Special purpose entities (SPE) were a factor in Enron’s accounting scandal. Read “The Rise and Fall of Enron” for more background information. Consider that FASB rules at that time only required 3% of the SPE to be held by investors outside of the company. Consider the pros and cons of following the FASB rules. Was Enron in violation of these rules? If not, what was the concern for SPE in Enron’s consolidated financial statements. Be sure to cite ASC codification if utilized in your discussion. USE YOUR OWN WORDS

see like below to find FASB rules

http://www.fasb.org/news/nr070102.shtml

THE RISE AND FALL OF ERON

https://www.journalofaccountancy.com/issues/2002/apr/theriseandfallofenron.html

Answer 1

At the time of creation of these SPEs by Enron, there was no specific requirement from the FASB for consolidation in the financial statements as the circular specifying the same was issued only on July 1, 2002. Therefore, technically Enron was not in violation of FASB rules. In general circumstances, SPEs are created in order to protect the interests of creditors and other stakeholders. In Enron’s case however, these entities were utilized to park the losses and bad assets so that they would not appear on the financial statements of Enron. This in turn led to the misrepresentation of the actual financial position of the company. The unclear statements and notes made in the financial statements with regards to these transactions with the SPEs resulted in raised eyebrows and a questionable sense of trust from the public. In addition an exorbitant amount of fees was paid to the CFO from these entities. When questioned about the nature of these transactions the heads of the company were quick to respond to the skeptics in a harsh manner. Therefore, although Enron was not required to present a consolidated financial position with respect to the SPEs at that point in time as per FASB rules,the nature of the transactions with the entities made it such that it should have disclosed the same in the financial statements.