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(Solved) What is the difference between a business's revenues and expenses?


summary of problem enron in chapter 2 (the audit market) page 62


Concept and a Company 2.4

 


 

Trading Fraud Early on at Enron

 

Concept Investigation of fraudulent acts.

 

Story

 


 

The first sign of fraud at Enron goes back to a trading division called Enron Oil in January 1987.

 

David Woyek, the head of Enron?s internal audit department, received a call from Apple Bank in New York.

 

He was told that wire transfers amounting to about $5 million had been flowing in from a bank in the Channel

 

Islands, and over $2 million went into an account of Tom Masteroeni, treasurer of Enron Oil. The Apple Bank

 

account could not be found anywhere on Enron?s books. Masteroeni admitted that he had diverted funds to

 

his account, but insisted that it was a profit-sharing tactic and that he always intended to repay the money.

 

After a preliminary investigation, Woyek?s deputy, John Beard wrote on his working papers ?misstatement of

 

records, deliberate manipulation of records, impact on financials for the year ending 12/31/86.? (McLean and

 

Elkin 2003)

 

Louis Borget, CEO of Enron Oil, explained that the Apple account was used to move profits from one quarter

 

to another for Enron management. From 1985, the oil trader had been doing deals with companies Isla,

 

Southwest, Petropol and other entities that allowed Enron Oil to generate the loss on one contract then have

 

the loss cancelled out by a second contract to generate a gain of the same amount. Borget described Enron

 

Oil as ?the swing entry to meet objectives each month.? Woyek wrote in a memo the process was a creation

 

of ?fictitious losses.? (McLean and Elkin 2003). The management of Enron Oil were not even reprimanded.

 

Instead, Borget received a thank you note saying, ?keep making millions for us.?

 

The internal auditors continued their investigation. They consulted directories of trading organizations, but

 

could not find Isla, Southwest, or Petropol. They discovered other irregularities in the Apple account

 

amounting to hundreds of thousands of dollars. Before they completed their fieldwork, management told

 

them to stop and let the work be done by Enron?s outside auditor, Arthur Andersen.

 

Andersen presented their findings to the Enron audit committee of the board of directors some months later.

 

They told the board that they ?were unable to verify ownership or any other details? regarding Enron Oil?s

 

supposed trading partners. They also found that Enron Oil was supposed to have strict controls on trading ?

 

their open position was never supposed to exceed 8 million barrels, and when the losses reached $4 million,

 


 

the traders were required to liquidate their position. Andersen could not test the controls because Borget and

 

Masteroeni destroyed daily position reports.

 

But even so, Andersen would not give an opinion on these unusual transactions or whether the profit shifting

 

had a material impact on the financial statements. Andersen claimed that it was beyond their professional

 

competence and that they would rely on Enron itself to make that determination. Andersen got a letter from

 

Rich Kidder, Enron CEO, and another Enron lawyer saying, ?the unusual transactions would not have a

 

material effect on the financial statements and that no disclosure of these transactions is necessary.?

 

In October 1997, it was discovered that the management at Enron Oil had been losing on their trades and

 

they were $1.5 billion short. Enron fired Borget and Masteroeni and brought in traders who were able to

 

reduce the position to an $85 million charge which Enron announced for the third quarter of 1987. (Bryce

 

2002)

 

Discussion Questions

 


 

Was Andersen fulfilling its responsibility to consider fraud and risk?

 

Whose responsibility is it to determine the materiality of fraud on the financial statements:

 

Enron management or Andersen?

 


 

References

 


 

Bryce, Robert, 2002, Pipe Dreams: greed, ego and the death of Enron, Public Affairs, New

 

York.

 

McLean, Bethany and Peter Elkind, 2003, The Smartest Guys in The Room: the amazing

 

rise and scandalous fall of Enron, Portfolio, New York.

 


 

 


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