Auditing New Century Financial Corporation

Enron: The Smartest Guys in the Room

How did Enron manipulated the California energy market/

Enron staged a false "Energy Crisis"

Enron Traders Manipulated California Energy Costs: Enron's own attorneys admitted that Enron manipulated the California market (accordingly, California's two Democratic senators, Dianne Feinstein and Barbara Boxer, then demanded a criminal investigation by the U.S. Attorney General to see whether the company had committed fraud). Then, roughly two and a half years before he became the governor of California (signed into office: October 2003), Arnold Schwarzenegger met with Enron CEO, Kenneth Lay, at the Peninsula Beverly Hills Hotel in Beverly Hills. Los Angeles (Republican) Mayor Richard Riordan also met with Schwarzenegger and Lay in Beverly Hills (May 2001), when Enron presented a "Comprehensive Solution for California." This is an example of an Argumentative Fallacy, the "Straw Man Appeal": in order to rambunctiously yet optimistically fix this presumptively manufactured mess, or imagined fiasco, the strong suit of Enron demanded an end to Federal and state investigations into Enron's role in the California energy crisis.

The Enron crew that was arrested: Treasurer Ben Glisan, Jr., Andrew Fastow, Lea Fastow, Richard Causey, Jeffrey Skilling Kenneth Lay, Dan Boyle of Enron and Merrill Lynch bankers Daniel Bayly, Robert Furst, William Fuhs and James Brown.

Schwarzenegger, before he was the Governor of California, drew a "Red Flag" for the Western Area Power Administration (WAPA) when they discovered no power shortages or outages.

Referring directly to the video, explain how Enron specifically used "mark to market" accounting to artificially inflate earnings.

From Investopedia, " a measure of the fair value of accounts that can change over time, such as assets and liabilities. Mark to market aims to provide a realistic appraisal of an institution's or company's current financial situation."

1997: Enron manipulated the financial results of Enron Wholesale and its predecessor, ECT, through the implementation of other fraudulent tactics and deceptive devices. Case in point, the Tennessee Valley Authority ("TVA"), the ECT, and the $50 million that Enron gained from "mark-to-market" earnings, which was entirely undisclosed by Enron. TVA lost hundreds of millions of dollars in this ordeal; ECT had no records of any earnings whatsoever; whereas Enron gained roughly $50 million. Enron applied accrual accounting to the contract in order to avoid immediate disclosure of the loss in Enron's next quarterly earnings results. Through this measure, both Enron and the ECT commercial and accounting managers blocked the TVA contract out of the Enron's "mark-to-market" accounting books. This was notably a deliberate, if not exaggerated, effort by which to conceal fraudulence. Shady, seems the fitting word, to illustrate the deceit and disarray that ultimately brought Enron down.

C. Explain what audit procedures Andersen could have employed to evaluate the reasonableness of the SPEs and state whether (and why) they should have been put on the financial statements.

Here's why this move was arrogant: Andersen apparently must have assumed that the business would have been established within roughly a dozen major metro regions within the time span of a year, that eight new areas would be added yearly for well over a decade, until at least 2010, each growing at least 1% each of those years, and that Digital Subscriber Lines (DSLs) would be used by at least 5% of households. Moreover, Andersen must have then blindly trusted, since these sales would have increased to 32% by 2010, that Braveheart would accrue at least a solid half of this market, and that these would increase in a sufficient speed by which to leave no other executive any room to feel cheated. No reasonable person would have bet on all these factors coming together. Therefore, this is a great means by which to distinguish a dreamer from an investor blinded by, or course, arrogance and greed.

Enron overlooked an extensive "reality." Actually, Enron so wrongly miscalculated or misjudged the fair value of this Braveheart investment that Enron arrogantly drew up another red flag of deception. Was this optimistic Faith? Or blind-sighted arrogance? Had Andersen allowed Enron to report these values and their increases as profits, he would have needed to meticulously spend more time analyzing, proofreading, and checking back to assure his actions while he prepared the appraisal of the project's value. If Enron wanted to successfully pull off a heist of this stature, then meticulous attention must have been afforded. Andersen was sloppy and seemingly disengaged. Accordingly, arrogance is the only word to describe such a goof.

KPMG served as the independent audit firm of several of the largest sub-prime mortgage lenders. Identify the advantage and disadvantages of a heavy concentration of audit clients in one industry or sub-industry.

Citation: Danos, Paul. Eichenseher, John W. "Audit Industry Dynamics: Factors Affecting Changes in Client Industry Market Shares. Journal of Accounting Research." Institute of Professional Accounting. JSTOR.ORG. Vol. 20. No 2. Part II. Autumn 1982.

Full Citation (as posted in Jstor):

Audit Industry Dynamics: Factors Affecting Changes in Client-Industry Market Shares: Paul Danos and John W. Eichenseher. Journal of Accounting Research. Vol. 20, No. 2, Part II (Autumn 1982), pp. 604-616 (article consists of 13 pages). Published by: Blackwell Publishing on behalf of Accounting Research Center, Booth School of Business, University of Chicago

Stable URL:http://www.jstor.org/stable/2490888

The advantages and disadvantages of a heavy concentration of audit clients in one industry or sub-industry:

From Audit Industry Dynamics: Factors Affecting Changes in Client Industry Market Shares. Journal of Accounting Research, "[d]uring the past decade, the structure of the market for public accounting services -- particularly audit services -- has received scrutiny from regulators, practitioners, and researchers. A major focus has been on supplier (audit firm) size, and especially on the large shares of markets held by a subset of firms called the Big Eight." Rather, a means by which one might perceive this subset of firms.

"One hypothesis is that the Big Eight function as a cartel and charge higher than competitively warranted fees." Okay then, what about at&T or Verizon or T-Mobile or Sprint? Other than telephone companies, what about Dish, Comcast, or Clear Wireless? Why can these companies such unwarranted "hidden costs," whereas other companies cannot? Marketing within the United States is unscrupulous and deceitful. "... The Big Eight as a group tended to charge lower fees than non-Big Eight firms." This, too, is far more common in U.S. corporate marketing schemes than not. Rather, this commonality is what differentiates successful corporations from corporations and companies alike that go bankrupt. Hey, how about political endorsements and the perception of "Political Corruption" versus the perception of "Political Servitude"? That all falls under the same protective / protected umbrella.

The meaning of this illustration between the corrupt downfall of Enron, the fraudulent intents or deception employed by at&T, Verizon, T-Mobile, Sprint, Dish, Comcast, and Clear Wireless, and the perception of "... The Big Eight as a group tended to charge lower fees than non-Big Eight firms" is to showcase the hypocritical sense of the legalities enacted within the United States. Why is this seen as dishonest or fraudulent or deceptive / deceitful, when that is seen as a standard, or as traditional, or as a regular practice? Bill Gates -- who steals the progressive ideas and formats the framework slightly differently, then saturates the market with his cheaply made renditions -- is praised as a brilliant marketing genius, whereas Steve Jobs and Steve Wozniak are understood as merely the initial producers or idealistic manufacturers? Legalities with the United States are, then, absolutely a matter of perceptions and therefore shady.