01 Sep

Forensic Accountant Builds Successful Practice by Billing For Value, Not Time

International Association for Asset RecoveryThe path from Marquette undergraduate to forensic accounting expert was an unexpected one for Tracy Coenen. But she hadn’t counted on a chance semester of Financial Criminal Investigations and the impression left by her professor, a former IRS special agent.

“It was somewhat accidental and somewhat not,” Coenen said. Her professor explained the intricacies of financial investigations and how these cases could be cracked using techniques of accounting, as opposed to street maneuvers. Intrigued by the class content, Coenen, then majoring in criminology and law studies, used all her elective credits to take business and accounting classes to carve out a niche for her newfound interest. “That’s what got me interested in it, and then I had to figure out how to get into the private sector.” Read More

08 Jul

The Cost (and Risks) of Becoming an Audit Partner

Ever since my days as a staff auditor at Arthur Andersen, I’ve wondered what it costs to become a partner at a large firm. It’s obviously not something that is widely discussed with staff, so the youngsters all remain clueless.

But Francine McKenna of re: The Auditors has finally answered my question. She points to a report by the Center for Audit Quality. The report says that the average capital contribution per partner is $418,365, which is no small sum for an individual to pay. Read More

18 Aug

Conspiracy of Fools: Moments Before Enron’s Bankruptcy

As I’ve mentioned several times before, Conspiracy of Fools by Kurt Eichenwald has been a fascinating read. He dug so far into the details of the demise of the company and its executives.

The company was in a downward spiral, and a merger with another energy company, Dynegy, was seen as the only way for the company to survive. Dynegy injected some cash into the company, but immediately thereafter, Dynegy executives started finding out about Enron’s true financial picture. Undisclosed debt and secret related party transactions put the merger in jeopardy.

Finally, Dynegy called off the entire deal. It was clear that Enron’s only option was bankruptcy. Ray Bowen, treasurer of Enron, raced to a telephone.

He had to move fast. Some $400 million was sitting in accounts at Citibank, which would now be owed far more than that in the bankruptcy. The bank might seize the money as its own. Bowen needed to move it. Enron owed basically nothing to Goldman Sachs. That’s where it would go. He dialed the number for Mary Perkins, the assistant treasurer.

“Pull every penny we’ve got out of Citibank and wire it over to Goldman Sachs,” he said. “Do it now.”

McMahon immediately called the ratings agencies to let them know. Standard & Poor’s was the first to downgrade the company. Its debt was now rated at junk levels. Trading in Enron shares was suspended. When it resumed, the price plummeted 75 percent, to just above one dollar.

Computer-support technicians at Enron watched as the commands went through. Millions and millions of dollars were moving out of Enron’s bank accounts. They had no doubt what was going on. Someone was stealing all of Enron’s cash.

One executive made a decision. He had to stop it. He telephoned the first reporter he could think of.

11 Aug

Conspiracy of Fools: Chewco was not separate from Enron

Chewco, one of the special purpose entities (SPE) that Enron used to enhance its financial statements, was under examination by the Arthur Andersen accountants. Specifically, they came across a letter that indicated that six million dollars from JEDI (another SPE) would fund a reserve account.

This was the proof of a secret side agreement used to get the Chewco deal closed. The six million dollars had been placed in a reserve account to secure a portion of the money provided by Barclays Bank. Enron could argue all it wanted that Barclays’s cash was really equity and not a loan. It didn’t matter anymore. Chewco had been constructed with exactly three percent independent equity. With six million dollars secured, Barclays did not have that cash at risk. Even assuming Barclays’s money was equity, Chewco was short the three percent by at least six million dollars.

There could no longer be any question. The accounting failed. Chewco was not a valid special-purpose entity. It was Enron.

And that it how it came to pass that Enron was going to have to recognize losses from these entities on its own financial statements. The entities were really not independent, so their financial results were Enron’s financial results. The vehicles that Enron executives used to move losses off Enron’s financial statements failed.

08 Aug

Conspiracy of Fools: Who’s In Charge?

The partners at Arthur Andersen were having another argument about the management of the Enron account. As usual, Enron executives were throwing their weight around and trying to dictate who could be involved on their engagement. Specifically, they didn’t want Carl Bass to work on their account because he fought for the proper accounting treatment of items, not the creative ways that Enron used to enhance their financial statements. Read More

15 Jun

Conspiracy of Fools: Clever Nicknames for Enron’s Scams

John Forney, an Enron energy trader, came up with an idea to skirt the trading rules in California. Enron and Portland General were considered related, so California did not allow them to deal with each other on energy trading transactions. California was worried that since they were related, business done with each other might drive up prices for consumers.

To get around the rules, Enron would create a loop by purchasing electricity in California, passing it to one of its trading companies in another state, and then selling to Portland General, who sent it to California. The electricity was marked up at each stage of the loop, so Enron earned greater profits than it should have. Read More

06 May

Conspiracy of Fools: Materiality and Financial Statements

Enron had banking and finance relationships with some of the largest international firms: Credit Suisse First Boston, Merrill Lynch, and Greenwich NatWest to name a few. All of the firms were interested in continuing their business relationships with Enron, as the company brought significant fees with it.

As Enron was scrambling to meet analysts’ estimates for the fourth quarter of 1999, they were looking for “creative” ways to add profits to their bottom line. Read More

20 Apr

Conspiracy of Fools: Audit Adjustments

Enron had a history of trying to elicit favorable opinions on accounting issues from Arthur Andersen. The executives were aggressive in their reporting of income and expenses, always seeming to find a way to report things in the way that had the best effect on earnings.

As a part of Enron’s merger with Portland General, the company was acquiring a supply contract worth millions. Enron had a history of reporting income as soon as a contract was signed (which is a very aggressive and maybe incorrect accounting treatment), so naturally the executives wanted to book this contract as income immediately. Read More