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Enron assigned improper values to equity-method investments, securitized assets sold to special purpose entities (SPEs), limited partnerships, and barter transactions. Improper use of mark-to-market accounting played a part in the valuation of:

A)	barter transactions.

B)	securitized assets sold to SPEs.

C)	equity-method investments.

Enron marked to market some investments that were reflected using the equity method rather than consolidated into the company’s financial statements. Despite that accounting treatment, Enron still reported some of the investments at fair value.

Enron used a variety of methods to overstate its profits. Which of the following motivations was least important to Enron?

A)	Avoiding the violation of debt covenants.

B)	Protecting the investors in special purpose entities (SPEs).

C)	Boosting the stock price.

Boosting the stock price and avoiding the violation of debt covenants were important motivations for Enron to overstate its earnings. Enron did protect its SPE investors, but not by boosting earnings.

Enron left plenty of clues to its accounting fraud, some of which would have been easier to find than others. Which strategy would have been least effective at unearthing Enron’s fraud?

A)	Charting the historical seasonality of Enron’s earnings.

B)	Checking the cash flow/earnings index.

C)	Checking the reported mark-to-market values against actual values of similar securities.

Unfortunately, the cash flow/earnings index would have made Enron look good, as its operating cash flow was higher than net income. However, the numbers lied because Enron overstated its operating cash flow. Both remaining strategies would have led to information suggesting Enron’s results were bogus.

In general, it is a good thing when operating cash flow is greater than net income. Enron’s operating cash flow was greater than its net income, but the numbers did not tell the whole story because:

A)	investing cash flows were overstated.

B)	some of Enron’s reported cash flows were really from other companies not connected to Enron.

C)	Enron classified some financing transactions as operating transactions.

Enron artificially boosted operating cash flows by reporting some financing transactions as operating transactions. We have no information about whether investing cash flows were overstated or did not reflect all investing activities. But even if we did have such information, it would have no direct effect on why operating cash flows were inflated. And while Enron did a lot of dirty deeds, one thing it never seemed to do was assume the cash flows of companies not connected to itself.