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Accounting

1. Give an example of rationalization (fraud triangle) in the case of Enron. Justify your

answer with examples from the case.

The narrator goes on to say that "everyone" is doing it. He suspected that other firms were

constructing SPEs in order to hide debt and other obligations, making the corporation seem more

prosperous. As a result, he set up a number of SPEs to hide Enron's financial liabilities. Three of

the most important SPEs were the JML, JML1, and JML2. In order to avoid being accused of

breaking accounting requirements, he made them self-contained.

2. Give an example of opportunity (fraud triangle) in the case of Enron. Justify your

answer with examples from the case. 

Because Enron's internal controls were inadequate, the business's executives were able to commit

fraud while still employed by the corporation. Take, for example, the Board of Directors' support

of Fastow's proposal for the formation of SPEs, which was approved by the Board of Directors.

In this specific instance, the Enron Code of Conduct was found to be unconstitutional and illegal.

Enron's board of directors breached the idea of power separation by allowing Fastow to serve as
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both CFO and SPE administrator at the same time, as shown by his appointment to both

positions at the same time.

3. Give an example of pressure/incentive (fraud triangle) in the case of Enron. Justify

your answer with examples from the case.

Greed. After discovering that Valhalla, Louis Borget, and Tom Mastroeni had been trading

without permission, Lay increased their trading limit to reflect the situation. As a result of their

overcharging the corporation, he absolved them of any responsibility. As a result, they were no

longer a valuable asset to the company, and they were sacked. Excellent honors and accolades

have been bestowed upon us. In order to improve his public image, Fastow created SPEs to

enable Enron to hide debts while seeming to be successful at the time. In return for his efforts, he

was expected to get a substantial sum of money and goodwill.

4. Evaluate how Sarbanes-Oxley helps to reduce the factors in the fraud triangle for

Arthur Andersen. Give examples for two of those factors.

Among other things, the Sarbanes-Oxley Act was established in order to reduce the effect of

fraud on enterprises as a result of the Fraud triangle. Some of the steps it put in place included

improving company controls and holding auditors accountable when financial statements were

misrepresented. As a result, management must put in place robust internal controls, as well as

take further steps to protect the company's interests in general. The auditors were expected to

carry out a number of tests and methodologies in order to provide further assurance that the

financial statements were produced in conformity with accounting laws and regulations.
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5. Cite three examples (using three different Enron executives) that show the "Tone at the

Top" for Enron was unethical. 

Ken Lay allowed the two Valhalla traders to continue their Enron training despite the fact that

they had violated the company's policies. The board had anticipated that he would do so. Andy

Fastow set up and operated a SPE despite the fact that the other board members were not aware

of it. In order to avoid consulting the rest of the board of directors, Jeff Skilling used mark-to-

market accounting.