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

improper accounting was corrected). According to the SEC's former Chief Accountant, Andersen
ignored a basic accounting rule on this issue. An 11/12/01 Bloomberg article stated:
Lynn Turner, who was the SEC's chief accountant for three years until he
resigned in August, said Enron and Andersen ignored a basic accounting rule when
they overstated shareholder's equity.
Explaining the equity reduction last week, Enron said it had given common
stock to companies created by Enron's former chief financial officer in exchange for
notes receivable, and then improperly increased shareholder equity on its balance
sheet by the value of the notes.
"Basic Accounting"
"What we teach in college is that you don't record equity until you get cash
for it, and a note is not cash," said Turner, who is now director of the Center for
Quality Financial Reporting at Colorado State University. "It's a mystery how both
the company would violate, and the auditors would miss, such a basic accounting
rule, when the number is one billion dollars."
952. Proper financial accounting does not permit this result. To reach it, the accountants
at Enron and Andersen – including the local engagement team and Andersen's national office experts
in Chicago – circumvented numerous obstacles presented by pertinent accounting rules. A careful
review of the transactions show however, that the accounting violated several accounting rules and
Andersen knew it:
(a) Accounting principles forbid a company from recognizing an increase in the
value of its capital stock in its income statement except under limited circumstances not present here.
The substance of the Raptors and other transactions effectively allowed Enron to report net income
and gains on its income statement that were backed almost entirely by Enron stock, and contracts
to receive Enron stock, held by the Raptors. In essence, the transactions created net income from
thin air.
(b) Andersen-Houston consulted the PSG in Chicago frequently regarding the
Raptor transactions. PSG initially required an analysis of whether there was a minimum 3%
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