Business & Professional Ethics for Directors, Executives & Accountants, 5e

Multiple Choice Questions

Chapter 2 Enron Events Motivate Governance & Ethics Reform

1)Most observers agree that Enron’s problems were caused by:

  1. Management’s failure to exercise adequate oversight
  2. Failure of the audit committee to exercise adequate oversight
  3. Auditor’s lack of independence
  4. Deficiencies in audit procedures
  5. Failure of the board of directors to exercise adequate oversight

ANSWER: e

2)Under the U.S. accounting rules, the following conditions were required to consider special purpose entities (SPEs) to be independent parties:

  1. Independent investment of less than 3% of the SPE’s equity and independent control of the SPE
  2. Independent investment of at least 3% of the SPE’s equity and independent control of the SPE
  3. Substantive investment of at least 3% of the SPE’s equity and independent control of the SPE
  4. Independent investment of at least 3% of the SPE’s assets at risk and independent control of the SPE
  5. Substantive investment of less than 3% of the SPE’s assets at risk and independent control of the SPE

ANSWER: d

3)The Board of Directors’ paramount duty is:

  1. To determine management’s compensation
  2. To safeguard the interest of the company’s stakeholders
  3. To safeguard the company’s assets
  4. To formulate the company’s strategy
  5. To safeguard the interest of the company’s shareholders

ANSWER: e

4)The independence of the Enron Board of Directors was compromised by:

  1. Family ties between the company and certain board members
  2. Employment ties between the company and certain board members
  3. Financial ties between the company and certain board members
  4. Fiduciary ties between the company and certain board members
  5. All of the above

ANSWER: c

5)The following three broad duties stem from the fiduciary status of corporate directors:

  1. Obedience, loyalty, and confidentiality
  2. Obedience, loyalty, and due care
  3. Loyalty, due care, and confidentiality
  4. Obedience, loyalty, and good faith
  5. Loyalty, confidentiality, and good faith

ANSWER: b

6)In order to ensure an investment-grade credit rating, Enron began to emphasize the following three actions:

  1. Reducing accruals, increasing cash flow, and lowering debt
  2. Smoothing accruals, increasing cash flow, and lowering debt
  3. Increasing cash flow, lowering debt, and smoothing earnings
  4. Increasing cash flow, lowering earnings and decreasing option expense
  5. Increasing cash flow, lowering debt, and decreasing option expense

ANSWER: c

7)Which of the following was not a committee in Enron’s Board?

  1. Risk Management Committee
  2. Executive Committee
  3. Finance Committee
  4. Audit and Compliance Committee
  5. Nominating Committee

ANSWER: a

8)Enron referred to this transactions as “monetizing” or “syndicating” its assets:

  1. Buy more assets using syndicated loans
  2. Sell assets to third parties and record cash income as earnings
  3. Hedge the company’s assets
  4. Lend money to third parties to buy assets
  5. Recording profits on energy derivatives trading

ANSWER: b

9)Enron created the following SPE(s) to hide off-balance sheet liabilities, recognize revenues early , and recognize profits on own shares:

  1. LJM
  2. LJM1/Rhythms
  3. LJM2/Raptors
  4. Chewco/JEDI
  5. LJM3

ANSWER: d

10)Which of the following was not a flaw found in LJM1 arrangements?

  1. Profits were improperly recorded on treasury shares used or sheltered by non-existing hedges
  2. Enron was hiding employee stock option expense
  3. Enron was hedging itself
  4. Enron had to advance treasury shares to buy them back at preferential rates
  5. Enron officers and their helpers benefited

ANSWER: b

11)At the time of Enron’s collapse, the prevailing treatment for employee stock option expense was:

  1. Record stock options only when and if exercised, at exercise price
  2. Record all stock options when issued, at exercise price
  3. Record all stock options at market price
  4. Record stock options only when exercised at market price
  5. Record not exercised options at market price

ANSWER: a

12)Which of the following was not a conflict of interest that Arthur Andersen’s personnel encountered?

  1. Auditing their own work as SPE consultants
  2. Losing a very large client
  3. A partner reviewed another partner’s work
  4. Internal debates about Enron’s questionable accounting treatments were not discussed with the audit committee
  5. Audit staff leaving the firm to work for Enron

ANSWER: c

13)Which of the following was notamong Arthur Andersen’s shortcomings in conducting Enron’s audit?

  1. Lack of competence
  2. Failure of quality control standards
  3. Misunderstanding of auditor’s fiduciary role
  4. Inconclusive testing of control
  5. Insufficient information provided by Enron’s staff

ANSWER: d

14)Which of the following was not a strategy used by Enron to avoid taxes?

  1. Deduction of losses twice
  2. Shifting depreciable assets to non-depreciable assets
  3. Tax deductions for repayment of debt principal
  4. Duplication of single economic loss
  5. Generation of fees for serving as an accommodation party for another taxpayer

ANSWER: b

15)In general terms, WorldCom overstated its reported net income by:

  1. Generating false expenses
  2. Booking false revenue
  3. Capitalizing line costs
  4. Amortizing line costs quicker than allowed under GAAP
  5. Recognizing future period’s revenue

ANSWER: c

16)This type of manipulation is known as “cookie jar” accounting:

  1. Manipulation of profits through reserves or provisions
  2. Incorrect classification of long term debt as equity
  3. Incorrect classification of regular expenses as extraordinary items
  4. Manipulation of profits through booking revenue in early periods
  5. Manipulation of reserve for uncollectible amounts

ANSWER: a

17)After SOX, which of the following is not a prohibited non-audit service for external auditors?

  1. Appraisal or valuation services
  2. Bookkeeping and other services
  3. Legal services
  4. Tax services
  5. Internal audit outsourcing

ANSWER: d

18)Which of the following is not a requirement imposed by the SOX Corporate Governance Framework?

  1. The audit committee must be comprised solely by independent directors
  2. The audit committee is responsible for appointing the company’s external auditor
  3. The audit committee must establish procedures to allow employees to submit anonymous complaints
  4. The audit committee must approve non audit services to be provided by the auditors
  5. The audit committee must be comprised solely by financial experts

ANSWER: e

19)SOX increased the time requirement and legal risk for company directors. These requirements will likely:

  1. Increase the number of directors in the board
  2. Reduce the number of directors in the audit committee
  3. Increase audit fees
  4. Reduce the number of boards that each director sits on
  5. All of the above

ANSWER: d

20)These companies are more likely to voluntarily adopt improved governance measures:

  1. Larger companies
  2. Less profitable companies
  3. Foreign companies
  4. Smaller companies
  5. Private companies

ANSWER: a

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Business & Professional Ethics for Directors, Executives & Accountants, 5e,

L.J. Brooks & P. Dunn, Cengage Learning, 2010