Reference no: EM13728860

Financial Investigation: Off-Balance Sheet Land: discussion, read the following scenario then respond to the questions below.

Not a paper. No need for cover sheet. Just answer the questions Scenario:

The following article appeared in a local newspaper after the Enron Fraud was disclosed: Off-Balance-Sheet Land is Where Death Spirals Lurk Enron's crash has shown that very scary liabilities can hide in a set of books. Pay no attention to those liabilities behind the curtain.

That is the message corporate America has sent to investors in recent years as executives have shunted billions of dollars in new and existing financial obligations off their books and into the nether world known as "off the balance sheet." When the stock market roared, investors were only too happy to believe that what they didn't know about their company's true financial picture couldn't hurt them.

But now, in a crestfallen market reverberating with shock waves from the Enron collapse, shareholders are realizing that just because an obligation is absent from a company's balance sheet does not mean that it can't come back to bite them. What occurred at the Enron Corporation, at considerable distance from the assets and liabilities on its balance sheet, may of course prove an anomaly.

The company, now in bankruptcy but once the world's dominant energy trader, was an aggressive user of partnerships separated from the parent but for which the parent's shareholders remained on the hook.

Perhaps worse, it also committed the ultimate sin of omission-it failed to disclose the extent of its contingent liabilities related to those partnerships.

Under U.S. federal securities laws, those details should probably have been listed in at least the footnotes to the company's financial statements. In itself, off-balance-sheet financing is no vice. Companies can use it in perfectly legitimate ways that carry little risk to shareholders. The trouble is, while more companies are relying on off-balance-sheet methods to finance their operation, investor are usually unaware until it is too late that a company with a clean balance sheet may be loaded with debt.

Critics contend that one intent of these structures is to try to move debt off the radar screen so that companies appear less financially leveraged than they actually are. As a result, if investors take the financial statements at face value and not delve very deeply into these off-balance-sheet arrangements, the financial statements can be misunderstood.

Questions:

Is it ethical to keep the types of liabilities discussed in this article off the balance sheet, or is this a type of financial statement fraud? .

How would you explain to shareholders that off-balance sheet financing is ethical?