1. Dennis just got hired after not working for two years following his reporting
ID: 2535836 • Letter: 1
Question
1. Dennis just got hired after not working for two years following his reporting of financial statement fraud by his previous employer. Dennis was treated as an outcast and ultimately fired after the company “trumped up” some unsubstantiated claims of poor performance. Dennis fought the dismissal in court as wrongful termination but lost. It was two difficult years during which time his marriage broke up. In order to get hired for the new job, Dennis felt compelled to shade the truth about why he left the job. Here is what Dennis told the recruiter when asked whether he had left the company because of any differences: “I didn’t feel as though there was a good growth path and that it didn’t’ make sense to stay somewhere that wasn’t going to work out for me.” Did Dennis do the right thing? Explain.
2. In the Enron case, the company eventually turned to “back door” guaranteeing of the debt of Chewco, one of its SPEs, to satisfy equity investors. Assume that a$16 million loan agreement required that Enron stock should not fall below $40 per share. If the share price did decline below that trigger amount, either the loan would be called by the bank or the bank could choose to increase the guaranteed number of Enron shares based on the new price (assume $32). If the bank decides to increase the number of shares guaranteed, what would be (1) the original number of shares in the guarantee and (2) the new number of shares? Why would it be important from an accounting and ethical perspective for Enron to disclose information about the guarantee in its financial statements?
Explanation / Answer
Ans 1. As evident from the facts and circumstances of the case Dennis had acted as a whistleblower in his previous company. He had exposed the truth about the fraud perpetrated by his employer. As a result of this he was fired on grounds of unsubstantiated inefficiency. At the time of interview he should have disclosed this. Most companies now a days have whistleblower policy and in such a situation his previous background would have gone in his favour.
Ans 2(1). Original number of shares in the guarantee= 16000000/40=400000.
New no of shares=16000000/32=500000
From an accounting and ethical perspective the guarantee should have been disclosed as it would have been more beneficial in evaluating the true financial position of the company.
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