Please watch the video called “Bigger Than Enron” through an internet connection by logging onto the sites listed below (in order).
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You will be asked any one or more of the following questions or any combination of these questions or derivative questions from this video. You may use the following questions to test your ability to fully understand and fully comprehend the main themes of the video.
A) Briefly discuss the treatment of employee stock options under each of the following:
1. Previous FASB/APB/CAP on Stock Options [Hint APB Opinion #25]
2. FASB SFAS No. 123 as originally published.
3. FASB SFAS No. 123 as amended or revised (123R).
B) Mr. James Hooton of Arthur Andersen called Auditors the “Keepers of the Holy Grail”. What did Mr. Hooton mean by this? What is the role that auditors play in society? How do Auditors assist in the establishment of an efficient marketplace (include a discussion of the efficient market hypothesis)?
C) Mr. Lieberman (U.S. Senator) and Mr. Levitt (Former Chairman of the SEC) had different views on stock options. Specifically they discussed the topic in terms of the need to hire, attract and retain managerial talent. Briefly discuss those arguments. What is your opinion on that argument? Is there a solution to the problem?
D) In 1994 given the support of Senator Lieberman and others the US Senate passed a non-binding resolution that passed by a vote of 88-9 to require FASB to reconsider their position on the expensing of stock options. What happened as a result of this action? How did the then SEC Chairman Arthur Levitt enter into the equation? In retrospect, how did Mr. Levitt characterize his actions or inactions? What are the implications of FASB giving in to the pressure? Is it possible this can happen again? What safeguards
can be employed to try to make this not repeat?
E) Discuss the fraud at Sunbeam involving the CEO Al “Chainsaw” Dunlop. What accounting mechanisms were abused? Discuss the “Cookie Jar Reserves” or “Slush-Fund” and how they work. What actions can be taken by an Auditor to ensure that such “Reserves” and “Funds” are not established and abused by Management? [Hint: Retroactive Restatement vs. Current and Prospective Adjustments].
F) Discuss the Fraud at Waste Management. How did management “pull-off” the Fraud? When did the Auditors (Arthur Andersen) discovered what happened? Discuss the long-term agreement between Andersen and Waste Management. What does this agreement constitute? How and when did the SEC find out about the scandal and the arrangement? What did the SEC do in light of this unprecedented “agreement” between Andersen and Waste Management? Discuss the impact of the destruction of documents in the Waste Management case and the “Harbinger” of things to come at Enron. Do you believe in some way that the SEC assisted in the same behavior occurring at Enron by not severely punishing Andersen?
G) Discuss the Private Securities Litigation Reform Act of 1995 (PSLRA) passed by Congress over the Presidential veto. What impact did the PSLRA have on audits and auditors?
H) The Frontline story told of a squeeze on Auditing Fees in the late 1990s, the growth of consulting services, and the possible impairment on Auditor Independence. Describe the consequences of this environment as described in the story. Be certain to discuss the new business model of the CPA firms (consulting). Some say the audit was relegated to a commodity at that time. What do you think they meant by this? Was this problem resolved by Sarbanes-Oxley (SOX)? Cite and describe what was done by SOX
and reference the SOX Act section.
I) Discuss the issue of Mr. Carl Bass at Arthur Andersen (the Quality Control partner for the worldwide firm). What did Mr. Bass allege and what happened to Mr. Bass? How did Enron figure into the demise of Mr. Bass? Why did Andersen give into the Enron Senior Management?
J) A common theme in the scandals was that senior management did not let the Board know what was happening. In a post Sarbanes-Oxley world, what specific items or procedures may keep this from happening in the future? How has Sarbanes-Oxley addressed any of the concerns brought up in the program Bigger Than Enron? Do you think the measures found in Sarbanes-Oxley will be effective?
K) The former Chief Accountant at the SEC Mr. Lynn Turner described a system of people working at the large accounting and brokerage firms who would do nothing all day except think of was to circumvent GAAP. Such groups have led to the call for a “principles-based system” instead of a “rules-based system” of GAAP. Can you describe what is meant by such a system and how it may work? What is your opinion on the large audit firms participating in such an activity?