Enron is a large energy trading company that allegedly committed massive fraud. Enron's primary method of committing fraud was to record liabilities in related partnerships then known as special purpose entities that were not consolidated, or combined, with Enron's financial statements. Company executives have maintained that they did not know about these massive off-balance-sheet liabilities, which have been estimated to be several billion dollars. As a fraud investigator, how would you go about finding the existence of these liabilities and partnerships?
There are several methods that can be undertaken. The first step an auditor or fraud examiner can do is to ask management directly if off-balance sheet arrangements exist. If management says yes, the audit automatically takes an entirely different turn. The OBS arrangements need to then be verified through both internal and external documentation to ensure all aspects of the OBS are being properly recorded for the parent and the subsidiary company.
The fraud investigator needs to ...
The solution provides a detailed discussion of SPE use as relevant to the Enron case, and how a fraud investigator would go about finding the existence of these liabilities and partnerships. This is written based on my experience as a fraud investigator and from case law.