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Special Purpose Entities, give an example of a legitimate special purpose entity you have come across either online or in your daily life. Can you think of a way the special purpose entity could act fraudulently?

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Final answer:

A Special Purpose Entity (SPE) is a separate legal entity, like a Real Estate Investment Trust (REIT), designed to segregate certain assets or activities. SPEs can act fraudulently by masking a company's true financial state, as seen in the Enron scandal when SPEs were used to conceal debt and overstate assets.

Step-by-step explanation:

A Special Purpose Entity (SPE), also known as a Special Purpose Vehicle (SPV), is a subsidiary company with an asset/liability structure and legal status that makes its obligations secure even if the parent company goes bankrupt. An example of a legitimate SPE that many encounter in daily life is a Real Estate Investment Trust (REIT). REITs are frequently structured as SPEs to own, operate or finance income-producing real estate, separating these assets from the parent company's operations.

SPEs can act fraudulently if they are used to misrepresent a company's financial health. For instance, an SPE might be used to move assets off a company's balance sheet to create a misleadingly positive financial statement. This is similar to what happened in the high-profile case of Enron, where SPEs were used to hide debt and inflate asset values, which eventually led to the company's collapse.

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