Enron Corp. - University of California | Office of The President

designed to reassure investors that the transactions were fair to the Company. Enron stated in the
Form 10-Q for the 2nQ and 3rdQ 99 that "[m]anagement believes that the terms of the transactions
were reasonable and no less favorable than the terms of similar arrangements with unrelated third
parties." The Form 10-Q for the 1stQ 00 read: "the terms of the transactions with related parties
were reasonable and are representative of terms that would be negotiated with unrelated third
parties."
516. Contrary to the defendants' representations, Enron's transactions with its related
parties were not fair to Enron and were not on terms representative of those that could be obtained
in arm's-length transactions with third parties. In fact, the transactions with Enron's related parties
were grossly unfair to Enron and set up in a manner to permit the Company to pay off key Enron
insiders, including Fastow and certain favored investments banks and bankers, for their participation
in the scheme, which included arranging the illicit and illegal financial transactions with those
related parties on terms that no independent third party would ever have agreed to.
C. Enron's Failure to Make Proposed Audit Adjustments and Reclassifications
517. Enron has also admitted to failing to make proposed audit adjustments and
reclassifications it was informed about by Andersen in prior years because it had considered those
adjustments "immaterial." In each year, the changes which Enron refused to make would have
reduced Enron's net income. Enron has admitted that the proposed adjustment for 97 was
$51 million. This represented 48% of net income and 10% of recurring net income. Yet Enron
considered this amount to be "immaterial." However, Enron was required to consider the materiality
of events in the aggregate. SEC Staff Accounting Bulletin ("SAB") No. 99 states: 12
12 Even though SAB No. 99 was issued in 8/99, after the time Enron and Andersen made these
decisions, SAB No. 99 expressed that it did not create new GAAP, but instead reemphasized existing
GAAP.
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