Auditing a Publicly Traded Company Essay

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Auditing a Publicly Traded Company Dawnielle Dodaro, Randall Warkel, Kelly Quinn, Jamie Wilson, Sergiu Munteanu ACC/541 March 18, 2013 Heber Howard Auditing a Publicly Traded Company TO: Senior Management FROM: Team C DATE: March 18, 2013 SUBJECT: Auditing a Publicly Traded Company Company’s client, a publicly traded company, uses the share-based payments and special purpose entities (SPE). The research that Team C found will highlight the reporting requirements and accounting treatments for share-based payments and special purpose entities. A thorough understanding is required for proper reporting and the effects on financial statements. Special Purpose Entities A special purpose entity is, essentially, an off-balance sheet business segment. It is designed to be a limited purpose company, often for the accomplishing of a special project or to isolate the entire firm from a particularly risky project. It is created by selling business assets to the SPE. To achieve off-balance sheet status, the SPE requires additional investment by an independent third party investor of at least 10% of the total value of the entity1. In exchange for this investment, the third party investor controls the SPE and bears the risk of loss. Because they are limited and separated from the founding company, they can take on the role of financing projects that may be too risky for the parent company. They are isolated, and so their liability is isolated from the parent company. Therefore, what the company loses is the SPE assets. Because of the nature of SPEs, they have been the subject of much abuse. Companies have put in an excellent effort to creating an SPE where sponsors maintain control without owning majority-voting power. SPEs were one way that Enron kept much of its debt off its balance sheet. This has led to increased scrutiny of SPE transactions, and the
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