Case StudyW3 - Case Study Accounting Scandal Week 3 LaTeena...

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Case Study Accounting Scandal Week 3 LaTeena Moore May 22, 2011 Forensic Accounting and the Legal Environment MAY11 Sec B Professor: Hussain Kabani
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THE MAJOR PROBLEM The major problem for Enron was the numbers that were on the books were fixed so that the stock prices would remain high, but Enron wasn't paying high taxes. Robert Hermann, Enron’s general tax counsel during that time, was told by Jeff Skilling, Enron’s president that their accounting method allowed Enron to make money and grow without bringing in a lot of taxable cash. Of course, Enron had been buying any new venture that looked promising as a new profit center. However, the company began forming off balance sheet entities to move debt off of the balance sheet and transfer risk for their other business ventures. This was established to keep Enron's credit rating high, which was very important in their fields of business. They did this through a complex arrangement of special purpose entities they called the Raptors (Gutman, 2002). The Raptors were established to cover their losses if the stocks in their start-up businesses fell. Business analysts began trying to unravel the source of Enron's money. The Raptors would collapse if Enron stock fell below a certain point, because they were ultimately backed only by Enron stock. The deals were so complex that no one could really determine what was legal and what wasn't. Eventually, things began falling apart within the company. When Enron's stock began to decline, the Raptors began to decline as well. The company finally admitted that it had misstated the figures of its income and that the equity value of a couple of billion dollars was less than its balance sheet. In addition,
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This note was uploaded on 05/28/2011 for the course AC 574 taught by Professor Kabani during the Spring '09 term at Keller Graduate School of Management.

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Case StudyW3 - Case Study Accounting Scandal Week 3 LaTeena...

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