QUESTIONS :
1.Class let us apply the principle of professional skepticism. Regarding the Enron fraud, for instance, a lot of employees lost their life savings, by believing Ken Lay and investing in Enron. Now there was a way employee could have checked and been skeptical. I would say they trusted blindly, the words of Ken Lay.
Class let me share with you a relatively easy way that employees and investors could detect this fraud. Does anyone know that easy way?
2.Class, applying skepticism, we know that Ken Lay kept telling his employees to keep buying Enron stock and flooding their 401Ks with Enron stock. While he was saying this, Ken Lay himself was selling massive amounts of stock. As financials were fraudulently manipulated, comparative calculations to others in the industry, would not reveal the fraud.
Class, there is a specific SEC rule that insider trades must be reported within 3 days. Insider trades here would be trades done by Enron executives. If an investor or employee were to look at the SEC insider trade reports, they would discover that Ken Lay and other executives were selling massive amounts of stock and telling everyone else to buy. This is one sure way to know that there is something wrong in a company. I hope this tip will benefit all of you some day, if you are investing a company.
Class does anyone know which are the SEC Insider reports that one needs to look for?
3.Class, it requires to be reported in the 10K or 10Q. Closely related to related party transactions, is the issue of audit independence. Auditors are expected to independent. Many auditors are contemplating about audit independence being scrapped.
Class, why should auditors be forced to independence requirements, when attorneys, who make those big bucks from their clients, are not independent? Your views and thoughts?
4.Class, related party transactions could be transactions between executives and their family members, their private companies, between a parent and subsidiary. The emphasis is on the word "related".
FASB ASC 850 gives the following examples of related party transactions:
A parent entity and its subsidiaries.
Subsidiaries of a common parent.
An entity and trusts for the benefit of employees, such as pension and profit-sharing trusts that are managed by or under the trusteeship of the entity's management.
An entity and its principal owners, management, or members of their immediate families Affiliates.
Class, do you think that all related party transactions are fraudulent? Why or why not?
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