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Essay / Research Paper Abstract
A 6 page paper answering 5 questions about what SPEs are, why they exist and how Enron abused the tool in its accounting. The paper reviews the FASB rules under which Enron first – and legitimately, early on – began using the SPE as an accounting and functional tool. It provides examples of Enron’s abuses and Arthur Andersen’s failure to require that Enron consolidate its SPEs on Enron’s balance sheet. The paper reviews the legitimate use of the SPE and concludes with a letter from a large business to the FASB requesting that FASB consider that SPEs constitute a class of tools useful to large businesses and beneficial to the larger economy. Bibliography lists 12 sources.
Page Count:
6 pages (~225 words per page)
File: CC6_KSacctEnronSPE.rtf
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Unformatted sample text from the term paper:
(Special Purpose Entities) that existed on June 28th, 2002. At the time that Enron began establishing its several special-purpose entities (SPEs), its overt
purpose was to build for the long-term future without adversely affecting the short-term balance sheet. It was undertaking some projects that required intense capital outlay and that it believed
would post pleasing returns in the future. In the meantime, however, the capital requirements were such that had Enron included them on its balance sheet, then it risked either
dilution of future profits or its credit rating because of the great deal of debt that Enron would need to finance these projects in the early years (Note 8, 2001).
The accounting rules that existed at the time allowed Enron to establish SPEs that would assume the debt load of the functions for
which they were formed and allow Enron to avoid including the debt attributable to them on its own balance sheet (FASB proposes SPE guidance). They were not expected to
be profitable for some time; keeping them off Enrons balance sheet avoided the situation in which Enron would have to list the debt without any profit being associated with it.
This approach was legal and acceptable under FASB rules at the time. The Enron-specific problem arose when Enron did not consolidate its
SPEs within an accepted period of time. This was the fault of Arthur Andersen, Enrons auditing company. It should not have allowed Enron to extend its use of
older SPEs without at some point consolidating them into its own balance sheet. FASB rules that existed at the time state that consolidation must take place unless the SPE
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