During the summer of 2002, the financial press reported that Citigroup was being investigated for allegations that it had arranged


During the summer of 2002, the financial press reported that Citigroup was being investigated for allegations that it had arranged transactions for Enron so as to intentionally misrepresent the nature of the transactions and consequently achieve favorable balance sheet treatment. Essentially, the deals were structured to make it appear that money was coming into Enron from trading activities, rather than from loans.
A July 23, 2002, the New York Times article by Richard Oppel and Kurt Eichenwald entitled “Citigroup Said to Mold Deal to Help Enron Skirt Rules” suggested that Citigroup intentionally kept certain parts of a secret oral agreement out of the written record for fear that it would change the accounting treatment. Critics contend that this had the effect of significantly understating Enron’s liabilities, thus misleading investors and creditors. Citigroup maintains that, as a lender, it has no obligation to ensure that its clients account for transactions properly. The proper accounting, Citigroup insists, is the responsibility of the client and its auditor.
Answer the following questions.
(a) Who are the stakeholders in this situation?
(b) Do you think that a lender, in general, in arranging so called “structured financing” has a responsibility to ensure that its clients account for the financing in an appropriate fashion, or is this the responsibility of the client and its auditor?
(c) What effect did the fact that the written record did not disclose all characteristics of the transaction probably have on the auditor’s ability to evaluate the accounting treatment of this transaction?
(d) The New York Times article noted that in one presentation made to sell this kind of deal to Enron and other energy companies, Citigroup stated that using such an arrangement “eliminates the need for capital markets disclosure, keeping structure mechanics private.” Why might a company wish to conceal the terms of a financing arrangement from the capital markets (investors and creditors)? Is this appropriate? Do you think it is ethical for a lender to market deals in this way?
(e) Why was this deal more potentially harmful to shareholders than other off-balance-sheet transactions (for example, lease financing)?

A person, group or organization that has interest or concern in an organization. Stakeholders can affect or be affected by the organization's actions, objectives and policies. Some examples of key stakeholders are creditors, directors, employees,...
Balance Sheet
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...

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Financial Accounting Tools for business decision making

ISBN: 978-0470534779

6th Edition

Authors: Paul D. Kimmel, Jerry J. Weygandt, Donald E. Kieso

Question Details
Chapter # 10- Reporting and Analyzing Liabilities
Section: Broadening Your Perspective
Problem: 9
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Question Posted: September 21, 2011 14:17:38