Detecting Accounting Fraud Analysis And Ethics Global Edition 1st Global Edition Cecil W. Jackson - Solutions

Securitization refers to the pooling of loans and the trading of portions of these loans on securities markets in the form of collateralized debt obligations.True/False
According to GAAP, a company is allowed to recognize a profit in its financial statements in respect of the increase in the price of its own shares.True/False
Enron’s SPE Whitewing was used to borrow money that was paid to Enron for Whitewing’s purchase of Enron assets, and Enron recorded the cash received as cash flow from operating activities.True/False
Enron’s Bankruptcy Examiner concluded that the “Prepay Transactions” may have been Enron’s single largest source of cash during the four-year period prior to Enron’s filing for bankruptcy.True/False
Enron’s energy trading, especially its gas trading and its trading on the manipulated California electricity market, generated profits that staved off the inevitable crash caused by fictitious reports.True/False
The birth of the “weather derivative” grew out of Enron’s attention to fundamental weather information for its gas trading.True/False
At Enron Energy Services, many of the contracts were overvalued, as the energy loads required by its customers were based on guesswork and excessively optimistic assumptions.True/False
When a company guarantees the debt of its unconsolidated affiliates, it is a signal that these entities may be used to raise debt without recording it on the sponsoring company’s balance sheet.True/False
In order to finance Chewco as an SPE that did not have to become consolidated into Enron’s consolidated financial statements, it had to have a minimum of 3 percent of its equity ______________ contributed independently of Enron.
In respect of Enron’s SPEs Chewco and Jedi, the Powers Report identified three sources of fictitious income streams: a ______________ fee, management fees, and revenue recognized on Enron’s own stock.
Enron used LJM1 to create a false ______________ option hedge for its investment in Rhythms NetConnections.
In 2000, Enron Broadband’s revenues were way behind predictions. However, the accounting and financial problems were“solved” with the help of Andrew Fastow’s SPE named ______________ .
The electricity fiasco in California was concocted by Enron by transmitting energy into a fictional world ______________ of transmission schedules and ______________ congestion in power lines.
In a contrived sale to its SPE LJMI, Enron used what it referred to as the ______________ price to justify a mark-to-market revaluation of its ownership in the Cuiaba Power Plant.
Enron would ______________ a contract to a financial institution for the amount of the total future cash selling price, and it would get the cash up front. This solution is called ______________ .
In Enron’s Annual Report, the note titled “Unconsolidated Equity Affiliates”reflected the ______________ of unconsolidated affiliates in billions of dollars, which were then removed from the company’s balance sheet.
A company’s being late in publishing its balance sheet and statement of cash flows is a signal that the company is taking time to ______________ the statements as it has something to ______________ .
It was a signal that Enron’s debt was understated when its notes to the financial statements titled “Commitments” stated that Enron also ______________ the performance of certain of its unconsolidated affiliates in connection with letters of credit issued on behalf of those unconsolidated
For several years Enron kept growing through reckless and unsuccessful global projects by:(a) Constantly overstating its earning and understating its debts.(b) Practicing mark-to-market accounting.(c) Conducting artificial transactions with special purpose entities.(d) All of the above.
Enron arranged for Barclays Bank to provide $$11.4$ million for an Enron employee to acquire 3 percent of the equity capital of the SPE named Chewco, and Enron provided a $$6.6$ million collateral for its repayment. The Powers Report later concluded that Chewco “should have been consolidated
According to Enron’s Bankruptcy Examiner, the effect of Enron’s “prepay transactions” on its financial statements was:(a) Understatement of its debt.(b) Overstatement of its cash flow from operating activities.(c) Understatement of its cash flow from financing activities.(d) All of the
Enron Online was the biggest e-commerce entity in the world, selling over 800 different products, such as:(a) Gas and electricity.(b) Weather derivatives.(c) Metal futures.(d) All of the above.
Which of the following is a signal that a company may be using SPEs to overstate its earnings or understate its debt?(a) When references in the notes to the financial statements regarding unconsolidated affiliates are vague as to the reason for using the SPE, the name of the SPE, or the nature of
With its Prepay Transactions, Enron would enter into a contract to deliver a commodity in the future at a specified price. It would then sell the contract at a discount and receive cash up front. It then would take on an obligation to buy the commodity required for delivery and to pay for it in
Which of the following is not true regarding disclosure by Enron in its financial statements?(a) Enron disclosed that it guaranteed the performance of certain of its unconsolidated affiliates in connection with letters of credit.(b) Enron disclosed that a significant portion of its CFFO came from
For which of the following purposes did Enron not use its investment in Empressa Productura de Enerain (EPE) and the off balance-sheet entity LJM1?(a) To enter into a contrived sale of a percentage of Enron’s ownership in the Cuiaba Power Plant to LJM1.(b) To cause EPE to obtain a loan from a
Which of the following was not a signal in Enron’s financial statements of its financial problems?(a) Receivables increased as a percentage of sales.(b) Its debt-to-equity ratio decreased over time.(c) It used death-spiral financing in which it guaranteed that if Enron’s stock fell below
Which of the following was not a false revenue stream that was generated by Enron’s use of off-balance-sheet entities Chewco and Jedi, as identified by the Powers Report?(a) A guarantee fee.(b) Management fees.(c) Gain on revaluation of an asset.(d) Revenue recognized on Enron’s own stock.
Two ways in which Enron used SPEs to overstate earnings were the abuse of mark-to-market accounting and contrived related party sales. Choose one asset that Enron used to employ both of these methods and describe how the asset was used to overstate earnings via contrived sales and to overstate
Another way in which Enron used off balance-sheet entities to overstate earnings was via the recognition of profit on its own stock. With reference to an off-balance sheet entity discussed in the text, explain how Enron recognized profit on the appreciation of its own stock.
Explain why Enron had so much debt from the time of its inception onward and explain why it was under pressure to hide this debt.
Explain how Enron used the “Prepay Transactions” to overstate CFFO.
Describe how SPE LJM1 was used to assist Enron to fictitiously recognize income on its investment in Rhythms Net Connections (RHYTHMS).
Explain why vague references to off-balance-sheet entities or unconsolidated affiliates in notes to a company’s financial statements or in its MD&A may be a signal that a company could be engaging in fictitious financial reporting.
Bronto Company invested in 10,000 shares in Saurus Company, which it purchased in June 2012 for $$1$ per share, before Saurus went public. On December 1, 2012, Saurus Company went public, and by December 31, 2012, its shares were trading at $$5$ per share. However, Bronto was not allowed to
Power Company acquires 80 percent of the shares (80 shares) in Emperor Company for $$20$ million on January 1, 2012. On December 31, 2012, Power Company forms an unconsolidated partnership named P2 and issues 1,000 Power Company shares to P2 for a 90 percent share in P2. The CFO of Power Company
Sabre Company’s summarized income statements for the last three years are presented below.Requireda. Calculate the times-interest-earned ratio for years 1–3.b. Comment on Sabre Company’s times interest-earned ratio over the three year period as a signal of its ability to continue to meet its
On January 1, Khaan Company obtained a $30,000 loan from Raptorex Company. The loan terms specify that the loan amount must be repaid on three specific repayment dates by the issue of shares in Khaan.The number of the shares to be issued depends on the market value of the Khaan shares on each
The SEC maintained that when communicating with investors and financial analysts, Adelphia misrepresented the extent to which it had upgraded its cable plant.True/False
According to the SEC’s AAER 1555, Edison disclosed the existence and amount of its District-Paid Expenses, but did not properly offset them from revenues.True/False
The intermingling of a company’s assets or liabilities with personal assets or liabilities of its major shareholders, officers, or directors is a signal of poor internal control.True/False
Krispy Kreme’s growth was too rapid with the addition of many new franchised stores at the expense of existing franchises.True/False
Same-store revenue for Krispy Kreme was growing much more slowly than parent company revenue.True/False
BellSouth is presented in the text as an example of the improper disclosure of non-GAAP information.True/False
Krispy Kreme was suffering from a lack of controls, procedures, and resources, but its business was experiencing an explosive growth.True/False
Krispy Kreme’s internally appointed independent investigation into its business practices concluded that the company’s accounting errors were intentional.True/False
In the recording of Krispy Kreme’s roundtrip transactions, equipment sales were made to a franchisee shortly before the reacquisition of the franchise and the sales price of the equipment was deducted from the reacquisition cost of the franchise.True/False
Krispy Kreme also failed to accrue the full amount of incentive compensation expense in accordance with the company’s incentive plan.True/False
In the case of Edison Schools, Inc., its inadequate disclosure did not affect the amount of net ____________ it reported.
Edison’s practice was to report the gross amount of the fee per student as its ____________in its income statement.
In the ____________case, the issue was that it did not accurately and completely describe the realities of its operations in its MD & A.
It was not clear that the revenue in the income statement needed to be reported net of the district-paid expenses for those cases in which Edison was not the primary ____________.
According to the SEC, Adelphia purchased land from members of the Rigas family in terms of a contract in which a clause stated that the ____________ rights to the land would revert back to the owner after 20 years.
It is important for users of financial statements to be aware of different ____________ methods and to question why one method was ____________ rather than another.
According to the SEC, Telcel recorded a disbursement in its books and records based on invoices.
It is ___________ for a company to merely abide by the letter of the law if this inadvertently leads to the dissemination of ___________ information.
Adelphia, its subsidiaries, and the Rigas Entities all deposited and withdrew cash from a joint cash management system called ___________.
____________ debt was taken off Adelphia’s books, and new debt was taken ____________ without being reported on the balance sheet.
Edison Schools is presented in the chapter as an example of:(a) Failure to disclose related-party transactions.(b) Inadequate disclosures in its Management Discussion and Analysis (MD&A).(c) Improper accounting for payments in violation of the Foreign Corrupt Practices Act.(d) Inappropriate
Which of the following correctly describes the SEC’s finding against Edison?(a) Edison’s revenue recognition practices did not contravene GAAP, but failed to present an accurate picture of the issuer’s financial condition.(b) Edison’s recognition practices contravened GAAP.(c) Since the
Which of the following is not true regarding the SECs allegations against Adelphia?(a) The company concealed rampant selfdealing by the family that founded and controlled Adelphia.(b) The company falsified operations statistics.(c) The company improperly accounted for foreign payments in violation
In the criminal trial of founder John J. Rigas and his son Timothy Rigas, prosecutors alleged that the Rigas family:(a) Siphoned $100 million from Adelphia.(b) Hid $2.3 billion in debt.(c) Systematically deceived investors about Adelphia’s subscriber growth and its bottom line.(d) All of the
Adelphia’s overstatement of its number of cable subscribers in its 10-K reports:(a) Is an example of a revenue recognition practice that contravenes GAAP.(b) Caused it to overstate its earnings.(c) Is an example of the failure to properly disclose related-party transactions.(d) Is an example of
According to the SEC, BellSouth’s improper accounting for foreign payments in contravention of the Foreign Corrupt Practices Act (FCPA) included all of the following, except:(a) The use of fabricated invoices at Telcel.(b) Breaking a foreign country’s law that prohibited foreign companies from
FCPA violations often consist of bribery,(a) In which the amounts involved are not in themselves material.(b) Which can have serious consequences.(c) Which is difficult to identify in financial statements.(d) All of the above.
Krispy Kreme is presented in the text as an example of:(a) Improper accounting for related-party transactions.(b) Improper disclosure of non-GAAP financial measures.(c) Improper disclosure in its Management Discussion and Analysis.(d) Improper accounting for round-trip transactions.
Which of the following regarding Krispy Kreme’s round-trip transactions is not correct?(a) Krispy Kreme engaged in contrived equipment sales to franchisees.(b) The transactions inflated franchise reacquisition purchase prices.(c) The transactions resulted in the reporting of overstated net
Krispy Kreme’s internal investigation revealed each of the following accounting errors except:(a) The misallocation of compensation expenses to franchise reacquisition costs.(b) The creation of cookie-jar reserves to release into profit in later periods.(c) The recording of early shipments of
Is the intermingling of a company’s assets with those of a major shareholder, director, or company officer illegal? Is it unethical?Or is it both illegal and unethical? Explain your answer.
Discuss the improper accounting practices at Adelphia that were similar to the improper accounting practices at Enron.Use specific examples from each company.
In the case of Edison Schools, explain why the SEC issued an AAER even though it did not find that Edison’s revenue recognition practices did not contravene GAAP.
Explain how Adelphia misreported non-GAAP information.
Explain why an action can be taken against an issuer of financial statements in terms of the Foreign Corrupt Practices Act in respect of a suspicious payment without proving that the payment was for an illegal activity.
Explain what is meant by a ”round-trip transaction.”
Rhodes Co. manages a school for the Old England School District. In year 1, Rhodes Co.’s first year of operating the school, the school earned per pupil fees of $$100,000.$ Rhodes is responsible for teacher salaries and is considered to be the primary obligor for the salaries. However, the
Ruby Company manages the daily operations for the human resources department of Jade Company. In terms of the contract, Ruby receives a fee of $$100$ per year for each employee on Jade’s payroll, less the salary of Jade’s bookkeeper, who works full-time on human resource matters. Jade is the
Crafty Company manufactures and sells printers. On the last day of the first quarter of the year, Crafty contrives with Tricky Company to sell 100 printers to Tricky Company for $$1,000$ each. In terms of Crafty’s agreement with Tricky, Tricky will sell those 100 printers back to Crafty at the
Greasy Patties Corporation, a hamburger chain, has 100 stores. In its tenth year of operating, its total sales for year 10 amounted to $$100$ million. During year 11, Greasy Patties Corporation decides that it would be beneficial to report increased sales for the year, and it opens 50 new stores
The housing bubble could be described as an inflated price for houses in which a house’s price is not supported by the rents it could earn.True/False
Collateralized debt obligations consist of home loans pooled with other loans, such as car loans, credit card debt, and student loans, which are carved into tranches and securitized by the investment banks.True/False
Fannie Mae and Freddie Mac were established to accelerate the funding and issue of mortgage loans.True/False
Investment banks and mortgage lenders began to invest in CDSs to hedge against claims against them in the event of default on the bonds they had sold or securitized.True/False
As a result of the process of tranching, a ratings agency could give a higher credit rating to a class of securities carved from a pool of loans than would be given to other classes of securities carved from the same pool of loans.True/False
The term underwriting standards refers to the credit risk standards that lenders require to be met before they will grant a loan to a borrower.True/False
The Glass-Steagall Act of 1933 had separated commercial banking from investment banking, which prevented commercial banks from trading in securities.True/False
Lehman Brothers’ bankruptcy was due to the investment of its own capital into assets, such as subprime assets, Alt-A residential mortgages, and mortgage-backed securities, that incurred huge losses resulting in a $2.8 billion loss in 2008.True/False
The 80/20 loan is a mortgage loan whereby the borrower takes out a loan for 80 percent of the purchase price and a second loan for 20 percent of the purchase price, leaving the borrower with no equity in the house at the time of the loan.True/False
A repurchase transaction (repo) takes place when a firm sells securities for cash with the understanding that the buyer will return the securities for a specified price at a specified future date.True/False
Permission granted to buy conventional mortgages, which were not government guaranteed, opened doors to the formation of new types of mortgage companies that expanded into __________ subprime loans.
In the mortgage industry, more and more nonconforming loans were purchased, pooled, and segmented into tranches of different grades of risk and then sold to investors as __________ securities.
The process in which many loans are pooled together and interests in these pooled loans are sold to investors is known as __________.
An MBS is a financial __________ that gives the owner a partial interest in a pool of mortgage loans.
In 1970, __________ _____ issued the first MBSs in the United States when it sold securities backed by its FHA and VA loans.
Before the passage of the Secondary Mortgage Market Enhancement Act of 1984, there were regulations that prohibited __________ investors from investing in mortgage-backed securities that were not backed by GSEs.
If the allowance for home loan losses does not increase when the value of the houses decrease, it is a signal that the company may be __________ the allowance for loan losses.
Tranching is a process of carving up or separating a pool of mortgages into different classes of securities that absorb different __________ losses.
Countrywide, once the largest mortgage company in the United States, was acquired by Bank of America in __________.
__________, former CEO of Countrywide, settled an SEC civil fraud case for $$67.5$ million in October 2010.
It is likely that a price bubble exists when:(a) The price of an asset increases sharply.(b) The earnings related to an asset increase sharply.(c) An asset’s price and its earnings increase sharply.(d) An asset’s price increases faster than its earnings.
The 1968 Charter Act facilitated the granting of mortgage loans by:(a) Establishing the Federal National Mortgage Association to buy up mortgages that were guaranteed by the Federal Housing Administration (Fannie Mae).(b) Expanding the mandate of Fannie Mae to include the purchase of mortgages that

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Detecting Accounting Fraud Analysis And Ethics Global Edition 1st Global Edition Cecil W. Jackson - Solutions

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