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.
Instructions
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)?