Enron Corporation was a darling in the energy-provider arena, and in January 2001 its stock price rose above$100 per share. A collapse of investor confidence in 2001 and revelations of accounting fraud led to one of thelargest bankruptcies in U.S. history. By the end of the year, Enron’s stock price had plummeted to less than $1per share. Investigations and lawsuits followed. One problem area concerned transactions with related parties thatwere not adequately disclosed in the company’s financial statements. Critics stated that the lack of informationabout these transactions made it difficult for analysts following Enron to identify problems the company wasexperiencing.Required:1. Obtain the relevant authoritative literature on related-party transactions using the FASB Accounting StandardsCodification at the FASB website (www.fasb.org). What is the specific citation that outlines the requiredinformation on related-party disclosures that must be included in the notes to the financial statements?2. Describe the disclosures required for related-party transactions.3. Use EDGAR (www.sec.gov) or another method to locate the December 31, 2000, financial statements ofEnron. Search for the related-party disclosure. Briefly describe the relationship central to the various transactions described.4. Why is it important that companies disclose related-party transactions? Use the Enron disclosure of the saleof dark fiber inventory in your answer.
Enron Corporation was a darling in the energy-provider arena, and in January 2001 its stock price rose above
$100 per share. A collapse of investor confidence in 2001 and revelations of accounting fraud led to one of the
largest bankruptcies in U.S. history. By the end of the year, Enron’s stock price had plummeted to less than $1
per share. Investigations and lawsuits followed. One problem area concerned transactions with related parties that
were not adequately disclosed in the company’s financial statements. Critics stated that the lack of information
about these transactions made it difficult for analysts following Enron to identify problems the company was
experiencing.
Required:
1. Obtain the relevant authoritative literature on related-party transactions using the FASB Accounting Standards
Codification at the FASB website (www.fasb.org). What is the specific citation that outlines the required
information on related-party disclosures that must be included in the notes to the financial statements?
2. Describe the disclosures required for related-party transactions.
3. Use EDGAR (www.sec.gov) or another method to locate the December 31, 2000, financial statements of
Enron. Search for the related-party disclosure. Briefly describe the relationship central to the various transactions described.
4. Why is it important that companies disclose related-party transactions? Use the Enron disclosure of the sale
of dark fiber inventory in your answer.
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