Score High in Quizzes: Expert Assistance for Accounting

Published: 11 months ago

Score High in Quizzes: Expert Assistance for Accounting

The Andersen IndictmentAlthough the massive restatements of Enron’s financial statements cast serious doubt on Andersen’s professional conduct and audit opinions, ultimately it was the destruction of Enron-related documents in October and November 2001 and the March 2002 federal indictment of Andersen that led to the firm’s rapid downward spiral. The criminal charge against Andersen related to the obstruction of justice for destroying documents after the federal investigation had begun into the Enron collapse. According to the indictment, Andersen allegedly eliminated potentially incriminating evidence by shredding massive amounts of Enron-related audit workpapers and documents. The government alleged that Andersen partners in Houston were directed by the firm’s national office legal counsel in Chicago to shred the documents. The U.S. Justice Department contended that Andersen continued to shred Enron documents after it knew of the SEC investigation, but before a formal subpoena was received by Andersen. The shredding stopped on November 8th when Andersen received the SEC’s subpoena for all Enron-related documents.

Andersen denied that its corporate counsel recommended such a course of action and assigned the blame for the document destruction to a group of rogue employees in its Houston office seeking to save their own reputations. The evidence is unclear as to exactly who ordered the shredding of the Enron documents or even what documents were shredded.

However, central to the Justice Department’s indictment was an email forwarded from Nancy Temple, Andersen’s corporate counsel in Chicago, to David Duncan, the Houston-based Enron engagement partner. The body of the email states, “It might be useful to consider reminding the engagement team of our documentation and retention policy. It will be helpful to make sure that we have complied with the policy. Let me know if you have any questions.”20

The Justice Department argued that Andersen’s general counsel’s email was a thinly veiled directive from Andersen headquarters to ensure that all Enron-related documents that should have previously been destroyed according to the firm’s policy were destroyed. Andersen contended that the infamous Nancy Temple memo simply encouraged adherence to normal engagement documentation policy, including the explicit need to retain documents in certain situations and was never intended to obstruct the government’s investigation. However, it is important to understand that once an individual or a firm has reason to believe that a federal investigation is forthcoming, it is considered “obstruction of justice” to destroy documents that might serve as evidence, even before an official subpoena is filed.

In January 2002, Andersen fired Enron engagement partner David Duncan, for his role in the document shredding activities. Duncan later testified that he did not initially think that what he did was wrong and initially maintained his innocence in interviews with government prosecutors. He even signed a joint defense agreement with Andersen on March 20, 2002. Shortly thereafter, Duncan decided to plead guilty to obstruction of justice charges after “a lot of soul searching about my intent and what was in my head at the time.”21

In the obstruction of justice trial against Andersen, Duncan testified for the Federal prosecution, admitting that he ordered the destruction of documents because of the email he received from Andersen’s counsel reminding him of the company’s document retention policy. He also testified that he wanted to get rid of documents that could be used by prosecuting attorneys and SEC investigators.22

20 Temple, Nancy A. Email to Michael C. Odom, “Document Retention Policy” October 12, 2001.21 Beltran, Luisa, Jennifer Rogers, and Brett Gering. “Duncan: I Changed My Mind.” cnnfn.com. May 15, 2002. See the following website: http://money.cnn.com/2002/05/15/news/companies/andersen/index.htm22 Weil, Jonathan, Alexei Barrionuevo. “Duncan Says Fears of Lawsuits Drove Shredding.” The Wall Street Journal. New York. May 15, 2002.Although convicted of obstruction of justice, Andersen continued to pursue legal recourse by appealing the verdict to the Fifth U.S. Circuit Court of Appeals in New Orleans. The Fifth Court refused to overturn the verdict, so Andersen appealed to the U.S. Supreme Court. The firm claimed that the trial judge “gave jurors poor guidelines for determining the company’s wrongdoing in shredding documents related to Enron Corp.”23 The Supreme Court agreed with Andersen and on May 31, 2005, the Court overturned the lower court’s decision.

Sadly, the Supreme Court’s decision had little effect on the future of Arthur Andersen. By 2005, Andersen employed only 200 people, most of whom were involved in fighting the remaining lawsuits against the firm and managing its few remaining assets. However, the ruling may have helped individual Arthur Andersen partners in civil suits named against them. The ruling also may have made it more difficult for the government to pursue future cases alleging obstruction of justice against individuals and companies.

The End of AndersenIn the early months of 2002, Andersen pursued the possibility of being acquired by one of the other four Big-5 accounting firms: PricewaterhouseCoopers, Ernst & Young, KPMG, and Deloitte & Touche. The most seriously considered possibility was an acquisition of the entire collection of Andersen partnerships by Deloitte & Touche, but the talks fell through only hours before an official announcement of the acquisition was scheduled to take place. The biggest barrier to an acquisition of Andersen apparently centered around fears that an acquirer would assume Andersen’s liabilities and responsibility for settling future Enron-related lawsuits.

In the aftermath of Enron’s collapse, Andersen began to unravel quickly, losing over 400 publicly traded clients by June 2002—including many high-profile clients with which Andersen had enjoyed long relationships.24 The list of former clients includes Delta Air Lines, FedEx, Merck, SunTrust Banks, Abbott Laboratories, Freddie Mac, and Valero Energy Corp. In addition to losing clients, Andersen lost many of its global practice units to rival accounting and consulting firms, and agreed to sell a major portion of its consulting business to KPMG consulting for $284 million as well as most of its tax advisory practice to Deloitte & Touche.

On March 26, 2002, Joseph Berardino, CEO of Andersen Worldwide, resigned as CEO, but remained with the firm. In an attempt to salvage the firm, Andersen hired former Federal Reserve chairman, Paul Volcker, to head an oversight board to make recommendations to rebuild Andersen. Mr. Volcker and the board recommended that Andersen split its consulting and auditing businesses and that Volcker and the seven-member board take over Andersen in order to realign firm management and to implement reforms. The success of the oversight board depended on Andersen’s ability to stave off criminal charges and settle lawsuits related to its work on Enron. Because Andersen failed to persuade the justice department to withdraw its charges, Mr. Volcker suspended the board’s efforts to rebuild the firm in April 2002.

Andersen faced an uphill battle in its fight against the federal prosecutors’ charges of a felony count for obstruction of justice, regardless of the trial’s outcome. Never in the 215-year history of the U.S. financial system has a major financial-services firm survived a criminal indictment, and Andersen would not likely have been the first, even had the firm not actually been convicted of a single count of obstruction of justice on June 15, 2002. Andersen, along with many others, accused the justice department of a gross abuse of governmental power, and announced that it would appeal the conviction. However, the firm ceased to audit publicly held clients by August 31, 2002.

On May 31, 2005, the U.S. Supreme Court unanimously reversed Andersen’s convictions. The main reason given for the reversal was that the instructions given to the jury “failed to convey properly the elements of ‘corrupt persuasion’.”25

23 Bravin, Jess. “Justices Overturn Criminal Verdict in Andersen Case.” The Wall Street Journal. New York. May 31, 2005.24 Luke, Robert. “Andersen Explores Office Shifts in Atlanta.” The Atlanta Journal - Constitution, May 18, 2002.25 Arthur Andersen LLP v. United States, 544 U.S. 696 (2005).REQUIRED

[1] What were the business risks Enron faced, and how did those risks increase the likelihood of material misstatements in Enron’s financial statements?[2] In your own words, summarize how Enron used SPEs to hide large amounts of company debt.[3] (a) What are the responsibilities of a company’s board of directors? (b) Could the board of directors at Enron—especially the audit committee—have prevented the fall of Enron? (c) Should they have known about the risks and apparent lack of independence with Enron’s SPEs? What should they have done about it?[4] Explain how “rule-based” accounting standards differ from “principle-based” standards. How might fundamentally changing accounting standards from “bright-line” rules to principle-based standards help prevent another Enron-like fiasco in the future? Some argue that the trend toward adoption of international accounting standards represents a move toward more “principle-based” standards. Are there dangers in removing “bright-line” rules? What difficulties might be associated with such a change?[5] What are the auditor independence issues surrounding the provision of external auditing services, internal auditing services, and management consulting services for the same client? Develop arguments for why auditors should be allowed to perform these services for the same client. Develop separate arguments for why auditors should not be allowed to perform non-audit services for their audit clients. What is your view, and why?[6] A perceived lack of integrity caused irreparable damage to both Andersen and Enron. How can you apply the principles learned in this case personally? Generate an example of how involvement in unethical or illegal activities, or even the appearance of such involvement, might affect your career. What are the possible consequences when others question your integrity? What can you do to preserve your reputation throughout your career?[7] Enron and Andersen suffered severe consequences because of their perceived lack of integrity and damaged reputations. In fact, some people believe the fall of Enron occurred because of a form of “run on the bank.” Some argue that Andersen experienced a similar “run on the bank” as many top clients quickly dropped the firm in the wake of Enron’s collapse. Is the “run on the bank” analogy valid for both firms? Why or why not?[8] Why do audit partners struggle with making tough accounting decisions that may be contrary to their client’s position on an issue? What changes should the profession make to eliminate these obstacles?[9] What has been done, and what more do you believe should be done to restore the public trust in the auditing profession and in the nation’s financial reporting system?

14. Martin Footwear Co. produces high-quality shoes. To prepare for next year's marketing campaign, the..

Martin Footwear Co. produces high-quality shoes. To prepare for next year's marketing campaign, the company's controller has prepared the following information for the current year, 2012:

Variable costs (per pair of shoes)

Direct materials $40 Direct manufacturing labour 19 Variable overhead (manufacturing, marketing, distribution, customer service, and administration) 23 Total variable costs 82 Fixed costs Manufacturing $2,656,000 Marketing, distribution, and customer service 516,000 Administrative 739,000 Total fixed costs $3,911,000

Selling price per pair of shoes $182 Expected revenues, 2012 (50,500 units) $9,191,000 Income tax rate 40%

(a)

Calculate the projected operating income before tax for 2012.

15. P3-3ACostello Advertising SpA was founded by Pat Costello in January 2016. Pr below are both the ...

P3-3ACostello Advertising SpA was founded by Pat Costello in January 2016. Pr below are both the adjusted and unadjusted trial balances as of December 31, 2017. tioi as L August 3I. COSTELLO ADVERTISING SpA Trial Balance December 31, 2017 Unadjusted Cr. Adjusted Dr. Dr 11,000 23,500 5,000 2,500 60,000 as 11,000 18,000 8,600 3,350 60,000 Accounts Receivable Supplies Prepaid Insurance Equipment Accumulated Depreciation-Equipment Accounts Payable Interest Payable Notes Payable Unearned Service Revenue Salaries and Wages Payable Share Capital-Ordinary Retained Earnings Dividends Service Revenue Salaries and Wages Expense Insurance Expense Interest Expense Depreciation Expense Supplies Expense 26,000 5,000 5,000 7,200 20,000 20 5, 5,500 12,000 10,000 350 12,000 58,600 65 11,300 850 500 7,000 3,600 4,000 4,000 127,300 127,300 141,250 141,2 Rent Expense Instructions (a) Journalize the annual adjusting entries that were made. (b) Prepare an income statement and a retained earnings statement for the year endin financial position at December 31. December 31, 2017, and a statement of been outstanding 6 months, what is the annual interest rate on that note 14,500 in salaries in 2017, what was the balance in Salaries uestions (c) Answer the following q (1) If the note has (2) If the company paid 2 and Wages Payalhd er of Bellingham paration of anual hunes Salaries are paid on December 31, 2016? Company Ltd. at December 31. 2017, pro he preparation of annual adjusting entries.

16. A machine with a cost of $138,000 and accumulated depreciation of $93,000 is sold for $54,000...

A machine with a cost of $138,000 and accumulated depreciation of $93,000 is sold for $54,000 cash. The amount that should be reported as a source of cash under cash flows from investing activities is:

17. 6. On July 1st, Harding Construction purchases a bulldozer for $228,000. 

16. On July 1st, Harding Construction purchases a bulldozer for $228,000. The equipment has a 8 year life with a residual value of $16,000. Harding uses straight-line depreciation.



(a) Calculate the depreciation expense and provide the journal entry for the first year ending December 31st.



(b) Calculate the third year%u2019s depreciation expense and provide the journal entry for the third year ending December 31st.



(c) Calculate the last year%u2019s depreciation expense and provide the journal entry for the last year.

17.

18. On June 1, 2014, Aaron Company purchased equipment at a cost of $120,000 that has a depreciable cost of $90,000 and an estimated useful life of 3 years and 30,000 hours.



Using straight line depreciation, prepare the journal entry to record depreciation expense for (a) the first year, (b) the second year and (c) the last year.

18. Jasper Corporation incurred the following costs in April: Salesperson's salaries $40,000 Factory...

Jasper Corporation incurred the following costs in April:



Salesperson's salaries

$40,000



Factory maintenance worker

$20,000

Factory insurance

12,000



Administrative utilities

4,000

Factory supervisor salary

30,000



Administrative supplies

1,000

Advertising

15,000



Delivery truck insurance

2,000

Factory machine operator

22,000



Factory machine depreciation

6,000

Direct materials used

25,000



Receptionist salary

18,000



Total product costs are:

Answer

a. $115,000

b. $117,000

c. $130,000

d. $157,000

Question 47



Refer to the Jasper Corporation information above. Total period costs are:

Answer

a. $38,000

b. $40,000

c. $80,000

d. $86,000

19. On January 1, 2015, Shay issues $700,000 of 10%, 15-year bonds at a price of 97¾. Six years late...

On January 1, 2015, Shay issues $700,000 of 10%, 15-year bonds at a price of 97¾. Six years later, on January 1, 2021, Shay retires 20% of these bonds by buying them on the open market at 104½. All interest is accounted for and paid through December 31, 2020, the day before the purchase. The straight-line method is used to amortize any bond discount.

1.How much does the company receive when it issues the bonds on January 1, 2015?

2. What is the amount of the discount on the bonds at January 1, 2015?

3. How much amortization of the discount is recorded on the bonds for the entire period from January 1, 2015, through December 31, 2020?

4. What is the carrying (book) value of the bonds and the carrying value of the 20% soon-to-be-retired bonds as of the close of business on December 31, 2020?

5. How much did the company pay on January 1, 2021, to purchase the bonds that it retired?

6. What is the amount of the recorded gain or loss from retiring the bonds?

7. Prepare the journal entry to record the bond retirement at January 1, 2021.

20. "Lucky Ltd. invited applications for 50,000 equity shares of Rs. 10 each...

Case Study

"Lucky Ltd. invited applications for 50,000 equity shares of Rs. 10 each, payable as Rs. 2 on application, Rs. 3 on allotment and the balance on first and final call. Applications were received for 1,50,000 shares and the share were allotted on a pro-rata basis, The excess application money was to be adjusted against allotment only. Maya, a holder who had applied for 1,500 shares, failed to pay the call money and her share were forfeited and were reissued @ 8 per share as fully paid."

Q1: What amount of bank received by the Lucy Ltd.

Q2: What amount of Share capital will be shown in the balance sheet of Lucky Ltd

Q3: What amount will be transfer to capital reserve account

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Case Study "Lucky Ltd. invited applications for 50,000 equity shares of Rs. 10 each, payable as Rs. 2 on application, Rs. 3 on allotment and the balance on first and final call. Applications were received for 1,50,000 shares and the share were allotted on a pro-rata basis, The excess application money was to be adjusted against allotment only. Maya, a holder who had applied for 1,500 shares, failed to pay the call money and her share were forfeited and were reissued @ 8 per share as fully paid." Q1: What amount of bank received by the Lucy Ltd. Q2: What amount of Share capital will be shown in the balance sheet of Lucky Ltd Q3: What amount will be transfer to capital reserve account

21. [A]Consignee becomes a debtor of the consignor when A the goods are despatched B the goods are...

[A]Consignee becomes a debtor of the consignor when

A the goods are despatched

B the goods are received

C the goods are sold.

[B]An account sales is a statement which shows the details about the

A goods received

B goods sold

C goods lying unsold.

[C] Del credere commission is given when the consignee

A sells all the goods on credit

B gets no ordinary commission

C bears the loss of bad debts.