Question 1

What is the culture at Enron that discussed in the case?

Accepted Answer

All three options are discussed in the case as part of the culture at Enron. Employees were expected to work long hours, sometimes into the night, to demonstrate their commitment to the company. Evaluation and ranking of employees in groups was a common practice, and those in the bottom 20% were at risk of losing their jobs. The culture at Enron also encouraged a cutthroat mentality, where employees were expected to say "yes" to superiors and prioritize the company's interests above all else.

Question 2

Which of the following was not a technique used by Enron to manage earnings?

Accepted Answer

Enron did not deliberately overstate the allowance for uncollectibles and adjust it downward in future years. However, Enron did use the other techniques listed (A, C, and D) to manage earnings.

Question 3

Congress passed the "Sarbanes-Oxley Act" on July 30, 2002. Which of the following is NOT true?

Accepted Answer

The answer of Congress passed the "Sarbanes-Oxley Act" on July...

Question 4

What was the original motivation by FASB on SPEs?

Accepted Answer

The original motivation by the Financial Accounting Standards Board (FASB) for Special Purpose Entities (SPEs) was to establish a mechanism that would encourage companies to invest in necessary assets while keeping related debt off their balance sheets. This was intended to help companies manage their financial ratios and maintain a healthier balance sheet appearance.

Question 5

All of the following are examples of "Boosting Income with One-Time Gains" except for:

Accepted Answer

Recording sales that lack economic substance is not a legitimate one-time gain; it is a manipulation of sales figures and does not represent a genuine financial transaction.

Question 6

"Earnings management either ignores or does not consider the rights of the investors and creditors to receive accurate, reliable and transparent financial statements." This statement is from:

Accepted Answer

This statement is from a rights perspective because it emphasizes the right of investors and creditors to receive accurate and reliable financial statements. It suggests that earnings management might violate the rights of these stakeholders by distorting financial statements for the benefit of the company or its managers.

Question 7

Which of the following partnership that Enron created eventually lead to its demise?

Accepted Answer

The Chewco partnership was created by Enron in order to hide debt and losses from their financial statements. This ultimately led to the revelation of their fraudulent accounting practices and the downfall of the company.

Question 8

The main difference between a discretionary and nondiscretionary accrual is:

Accepted Answer

Discretionary accruals are items that management has control over, whereas non-discretionary accruals are based on changes in the fundamental performance of the firm and arise from normal transactions. Discretionary accruals may or may not lead to an increase in earnings, depending on how management chooses to manipulate them.

Question 9

The basic ethical principle violated by Andy Fastow in his role as Enron's CFO and involvement with SPEs was:

Accepted Answer

Andy Fastow had a conflict of interests in his dual roles as he was both CFO of Enron and managing the Special Purpose Entities (SPEs), which led to unethical financial practices.

Question 10

Inherent risk refers to:

Accepted Answer

The answer of Inherent risk refers to:
...

Question 11

In the Matrixx Initiatives v. Siracusano case, the Supreme Court adopted the position about materiality that

Accepted Answer

The Supreme Court in Matrixx Initiatives v. Siracusano held that materiality should be determined by considering whether the total mix of information would be viewed by a reasonable investor as possibly accepting judgment. This means that both quantitative and qualitative factors should be considered, along with the context of the information and its potential impact on a reasonable investor's decision-making process. The amount affecting past financial statements is just one factor that may be relevant to materiality, but it alone is not determinative.

Question 12

According to AU 320, the evaluation of whether a misstatement could influence economic decisions of users

Accepted Answer

According to AU 320, the evaluation of whether a misstatement could influence economic decisions of users is essential to determining whether such a misstatement is material. Materiality is a key concept in auditing and can impact the type of opinion given on the financial statements.

Question 13

All of the following are examples of "Recording revenue too soon or of questionable quality" except for:

Accepted Answer

The answer of All of the following are examples of...

Question 14

The best way to characterize the role of Sherron Watkins in the downfall of Enron is:

Accepted Answer

Sherron Watkins is best known for being the whistleblower who tried to alert Enron CEO Ken Lay about accounting irregularities at the company. In August 2001, she sent an anonymous memo to Lay detailing her concerns about the company's accounting practices. Her memo ultimately led to the downfall of Enron and the exposure of one of the largest corporate frauds in history. While Watkins did play a role in directing the internal auditors to examine transactions, this was not her primary contribution to the scandal. She was not pressured by Andy Fastow to go along with materially misstated financial statements, and she was not sent to jail for her role in the Enron scandal.

Question 15

Which of the following was not true according to the Enron case?

Accepted Answer

According to the Enron case, Fastow did not develop the concept of buying up oil and gas companies to establish SPEs.

Question 16

Which of the following is NOT addressed in the Waste Management's case?

Accepted Answer

The misstatements represented 10% of pre-tax income, which was not considered material, is addressed in the Waste Management's case. B, C, and D are all addressed in the case.

Question 17

Accruals are potentially troublesome because:

Accepted Answer

Accruals can be manipulated through estimations to manage earnings. This can lead to misleading financial statements and potential ethical dilemmas for auditors.

Question 18

The expression, "Too many corporate managers, auditors, and analysts are participants in a game of nods and winks" is attributable to:

Accepted Answer

The expression is attributed to Arthur Levitt, who was the chairman of the Securities and Exchange Commission (SEC) from 1993 to 2001.

Question 19

There are several aspects of Enron fraud that are dealt with directly in SOX further connecting Enron to reform in the accounting profession. Which of the following is true?

Accepted Answer

SOX (Sarbanes-Oxley Act) requires that related-party transactions be disclosed in the financial statement notes to ensure transparency and prevent conflicts of interest.

Question 20

"Cookie jar reserves" can best be described as:

Accepted Answer

"Cookie jar reserves" refer to manipulating financial statements by either overstating or understating allowances and reversing amounts in the future to smooth out net income over time. It is often done to mask poor performance or artificially boost earnings in the future. The term comes from the idea that a company is hiding money away in a "cookie jar" for future use.

Quiz 7: Earnings Management and the Quality of Financial Reporting