1. The conceptual framework project represented an attempt by the FASB to develop the underlining concepts that would be useful
in guiding the Board in establishing standards and in providing a frame of reference for resolving accounting issues. The first two
Statements of Financial Accounting Concepts (SFAC No 1&2) set forth the objectives of financial reporting and what qualitative
characteristics it considered most important. What did SFAC No.1 set forth as the primary objectives of financial reporting? Whose
needs did it set forth as most important? Building on the concept of SFAC No.1, SFAC No.2 listed a “hierarchy of accounting qualities”
that should be taken into consideration when deciding what was important to report. Select any five of these qualities and explain each
fully.
2. In the summer of 1999, Navigant consulting had a share price of $54 per share and was voted as one of the best companies.
Within 90 days the stock price had collapsed and the CEO was fired. The culprit was “pooling of interests”. What is pooling of
interest? Why and how does this differ from GAAP accounting? How might this considered fraudulent? What impact does this have on
earnings? On the quality of earning? Why was this only abusive in the acquisition of private companies? Why and how did this impact the
subsequent decision to outlaw the practice for any NYSE publically listed company?
3. The Enron failure can be attributed mainly to management willingness to act improperly in financial reporting. The primary
culprit could be viewed as misuse of the rules of consolidation used in GAAP. Explain the rules of Consolidation. Explain the
misapplication of the rules as they were used specific to Enron. Describe the role of the Auditor in this scheme. Describe the
government regulatory answer to the problem. Explain your thoughts as to the efficacy of the government answer.
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