Question 1

Under the U.S.accounting rules, the following conditions were required to consider special purpose entities (SPEs)to be independent parties:

Accepted Answer

D

Question 2

After SOX, which of the following is not a prohibited non-audit service for external auditors?

Accepted Answer

Tax services are not prohibited under SOX, although they are subject to certain restrictions and must be pre-approved by the audit committee.

Question 3

Most observers agree that Enron's problems were caused by:

Accepted Answer

E

Question 4

Enron referred to this transactions as "monetizing" or "syndicating" its assets:

Accepted Answer

Enron would sell its assets to third parties and record the cash received as earnings. This would allow them to show increasing earnings and revenues, even though it did not reflect their actual business performance. This practice eventually led to Enron's downfall when it was exposed that they were hiding debt and inflating profits through these transactions.

Question 5

Which of the following was not a committee in Enron's Board?

Accepted Answer

The Risk Management Committee was not a part of Enron's Board. Enron had an Executive Committee, Finance Committee, Audit and Compliance Committee, and Nominating Committee.

Question 6

In order to ensure an investment-grade credit rating, Enron began to emphasize the following three actions:

Accepted Answer

Enron's emphasis on increasing cash flow and lowering debt are both common measures for achieving an investment-grade credit rating. However, smoothing earnings (or accruals) rather than reducing them outright was also a key strategy used by Enron to maintain the appearance of stability and consistency in its financial reports, thus improving its creditworthiness in the eyes of lenders and investors.

Question 7

Which of the following is not a requirement imposed by the SOX Corporate Governance Framework?

Accepted Answer

While the SOX Corporate Governance Framework suggests that having financial experts on the audit committee is beneficial, it does not require that the committee be comprised solely of financial experts.

Question 8

This type of manipulation is known as "cookie jar" accounting:

Accepted Answer

"Cookie jar" accounting refers to the manipulation of profits through reserves or provisions. This is done by creating excess reserves in good years to use in bad years, which artificially inflates profits in those years.

Question 9

Which of the following was not a conflict of interest that Arthur Andersen's personnel encountered?

Accepted Answer

A partner reviewing another partner's work is a standard practice in auditing to ensure quality and compliance, and it does not inherently represent a conflict of interest.

Question 10

These companies are more likely to voluntarily adopt improved governance measures:

Accepted Answer

Larger companies are more likely to adopt improved governance measures voluntarily due to greater scrutiny from investors, regulators, and the public, as well as the need to maintain a positive reputation and investor confidence.

Question 11

Which of the following was not among Arthur Andersen's shortcomings in conducting Enron's audit?

Accepted Answer

The answer of Which of the following was not among...

Question 12

The following three broad duties stem from the fiduciary status of corporate directors:

Accepted Answer

The three broad duties that stem from the fiduciary status of corporate directors are obedience, loyalty, and due care. Obedience refers to the directors' responsibility to comply with the company's articles of incorporation, bylaws, and applicable laws and regulations. Loyalty requires directors to act in the best interests of the corporation and its shareholders, and to avoid conflicts of interest. Due care refers to the diligence and skill that directors must exercise in making business decisions on behalf of the corporation. While confidentiality and good faith are important principles for directors to uphold, they are not among the central duties that derive from the fiduciary nature of their position.

Question 13

In general terms, WorldCom overstated its reported net income by:

Accepted Answer

WorldCom overstated its net income by capitalizing line costs, which are typically expenses, instead of recognizing them as expenses in the period they were incurred. This accounting manipulation inflated their profits.

Question 14

SOX increased the time requirement and legal risk for company directors.These requirements will likely:

Accepted Answer

The increased time requirement and legal risk for company directors due to SOX (Sarbanes-Oxley Act) would likely lead to directors reducing the number of boards they sit on to manage their responsibilities and risks more effectively.

Question 15

The Board of Directors' paramount duty is:

Accepted Answer

The primary duty of the Board of Directors is to safeguard the interests of the company's shareholders, as they are elected by shareholders to represent their interests and ensure the company's prosperity.

Question 16

Which of the following was not a strategy used by Enron to avoid taxes?

Accepted Answer

Shifting depreciable assets to non-depreciable assets is not a strategy used by Enron to avoid taxes. The other options were all used by Enron to minimize their tax liabilities.

Question 17

Which of the following was not a flaw found in LJM1 arrangements?

Accepted Answer

The hiding of employee stock option expense was not a flaw found in LJM1 arrangements.

Question 18

The independence of the Enron Board of Directors was compromised by:

Accepted Answer

The Enron Board of Directors' independence was compromised primarily due to financial ties, as many board members had financial relationships with the company that could influence their decision-making.

Question 19

Enron created the following SPE(s)to hide off-balance sheet liabilities, recognize revenues early , and recognize profits on own shares:

Accepted Answer

The answer of Enron created the following SPE(s)to hide off-balance...

Question 20

At the time of Enron's collapse, the prevailing treatment for employee stock option expense was:

Accepted Answer

At the time of Enron's collapse, companies typically recorded stock options only when they were exercised, and at the exercise price, not at the market price.

Quiz 9: The Credibility Crisis - Enron, WorldCom & SOX

Under the U.S.accounting rules, the following conditions were required to consider special purpose entities (SPEs) to be independent parties: