BYP10-11 During the summer of 2002 the financial press reported that Citigroup w
ID: 2783120 • Letter: B
Question
BYP10-11
During the summer of 2002 the financial press reported that Citigroup was being investigated for allegations that it had arranged transactions for Enron so as to intentionally misrepresent the nature of the transactions and consequently achieve favorable balance sheet treatment. Essentially, the deals were structured to make it appear that money was coming into Enron from trading activities, rather than from loans.
A July 23, 2002, New York Times article by Richard Oppel and Kurt Eichenwald entitled “Citigroup Said to Mold Deal to Help Enron Skirt Rules” suggested that Citigroup intentionally kept certain parts of a secret oral agreement out of the written record for fear that it would change the accounting treatment. Critics contend that this had the effect of significantly understating Enron's liabilities, thus misleading investors and creditors. Citigroup maintains that, as a lender, it has no obligation to ensure that its clients account for transactions properly. The proper accounting, Citigroup insists, is the responsibility of the client and its auditor.
Instructions
Answer the following questions.
(a)
Who are the stakeholders in this situation?
(b)
Do you think that a lender, in general, in arranging so called “structured financing” has a responsibility to ensure that its clients account for the financing in an appropriate fashion, or is this the responsibility of the client and its auditor?
(c)
What effect did the fact that the written record did not disclose all characteristics of the transaction probably have on the auditor's ability to evaluate the accounting treatment of this transaction?
(d)
The New York Times article noted that in one presentation made to sell this kind of deal to Enron and other energy companies, Citigroup stated that using such an arrangement “eliminates the need for capital markets disclosure, keeping structure mechanics private.” Why might a company wish to conceal the terms of a financing arrangement from the capital markets (investors and creditors)? Is this appropriate? Do you think it is ethical for a lender to market deals in this way?
(e)
Why was this deal more potentially harmful to shareholders than other off-balance-sheet transactions (for example, lease financing)?
BYP10-11
During the summer of 2002 the financial press reported that Citigroup was being investigated for allegations that it had arranged transactions for Enron so as to intentionally misrepresent the nature of the transactions and consequently achieve favorable balance sheet treatment. Essentially, the deals were structured to make it appear that money was coming into Enron from trading activities, rather than from loans.
A July 23, 2002, New York Times article by Richard Oppel and Kurt Eichenwald entitled “Citigroup Said to Mold Deal to Help Enron Skirt Rules” suggested that Citigroup intentionally kept certain parts of a secret oral agreement out of the written record for fear that it would change the accounting treatment. Critics contend that this had the effect of significantly understating Enron's liabilities, thus misleading investors and creditors. Citigroup maintains that, as a lender, it has no obligation to ensure that its clients account for transactions properly. The proper accounting, Citigroup insists, is the responsibility of the client and its auditor.
Explanation / Answer
a) The stakeholders in this situation are the Citigroup shareholders, Enron shareholders, employees of citigroup, employees of enron, and the regulatory authorities.
b) While lending, a lender has the responsibility to ensure that the deal complies to all regulatory guidelines and also all terms of the deal is captured in the legal contract documents. This is to ensure that the deal is not mis represented either on the lender's book or the borrower's book of accounts.
c) In case the terms of the deal are not captured in the contract agreement, it would not be possible for the auditors to capture the same in the accounting statements. The correct accounting treatment would not be possible unless all the terms and conditions are recorded.
d) It is neither ethical nor appropriate to misrepresent a deal. By not recording the true nature of the deal, the company is exposing the shareholders to undisclosed amount of risk. As the risk is not diclosed, the lender wouldn't have mitigated the risk, thereby exposing its creditors and investors to unmitigated risks.
e) This deal was potentially more harmful than off balance sheet transactions, as the true nature of the deal was not captured. The risk of the deal was neither assessed nor encoded in the legal agreements. This exposes the lender to not only losses arising from credit eventualities but also legal risk. The onvestors and creditors would be able to sue the lender for the illegal nature of the transaction.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.