Viktoria Martirosyan
Case 1.1
Qt.1
Several parties were responsible for Enron crisis, including independent auditor, key executive officers, internal auditors, SEC and FASB. The hypocrisy, dishonorable actions and unethical behavior of Kenney Lay, Jeffrey Skilling, Andrew Fastow led to bankruptcy. This and many other problems, such as loss in transactions involving the swaps stocks, SPE related issues and est., finally contributed to crisis. As Enron executives, all of their concerns should have been focused on Enron’s profits, but seems that many of them only cared about their wealth. When financial problem surfaced, they did not attempt to fix it, but made efforts to maintain their own benefits and ignored the whole company’s and
…show more content…
Enron made only nominal financial statement disclosures for its SPE transactions and those disclosures were typically presented in confusing if not cryptic, language. 2. SAS 55- Internal Controls. Judging from the case, it can be clearly seen that internal control was not working properly. 3. SAS 45 Related parties - Special Purpose entities were a mechanism to raise needed financing for various purposes without being required to report the debt in their balance sheets. Enron used gaping loophole in accounting practice to create hundreds of SPEs and it did not limit its SPEs to financing activities. Enron used SPEs for the purpose of downloading underperforming assets from its financial statements to the financial statements of related by unconsolidated entities. SPE would finance the purchase of those assets by loans collateralized by Enron’s common stock. In some cased, undisclosed side agreement made by Enron with an SPE’s nominal owner insulated those individuals from any losses on their investments and, in fact, guaranteed them a windfall profit. Even more troubling, Enron often sold assets at grossly inflated prices to their SPEs allowing the company to manufacture large “paper” gain on those transactions.
Qt.4
Audit documentation as per SAS 103, is a record of audit procedures performed, relevant audit evidence obtained, and conclusions the auditor reached. It supports the fact that the audit was done in accordance with auditing
In 1985 The Enron Corporation came into existence after a successful merger between two gas pipeline companies. The company nurtured a very competitive culture, which encouraged employees to win at any means necessary. Enron’s culture led employees to “cast loyalty and ethics aside in favor of high performance” (Ferrell, p. 494). The executives of Enron covered up their increasing debt by using special purpose entities. Meanwhile, Enron continued to report increasing profits to their investors, which led to more investors giving Enron their money. There were many factors that aided Enron in their demise, but the largest was the greed of Enron’s executives, the auditors, and the attorneys. The corporate culture of Enron, their auditors bankers and attorneys and their Chief Financial Officer played vital roles in the fall of Enron.
4. Yes, lack of clarity in Enron financial reporting is a red flag that could be the possibility of fraud. Especially when the red flag is about Enron's pricey or increase of stock. Many of the owners of the stock are not confident with Enron because of the unclear financial report and their inconsistency. Some of them said that Enron is an earning at risk story. In 1990 around 80% of its revenues came from the regulated gas-pipeline business. But Enron has been steadily selling off its old-economy iron and steel assets and
Enron neglected two vital internal controls when it found the LJM1 SPE. On one hand, Enron’s board of directors waived the Code of Conduct of the company, which prohibited the existence of LJM1, and approved the SPE’s creation. On the other hand, by appointing Andrew Fastow to operate the SPE, Enron breached the SEC’s rule that company executives are not permitted to control separate entities if those entities are directly related to the company. If they had heeded the protective internal controls established by the company and the SEC, Enron executives may likely to avoid the fraud that caused its eventual corporate
Enron was once one of the world's leading electricity, natural gas, pulp, paper and communications companies. However, in December 2, 2001, Enron suddenly filed for bankruptcy. During the ten years before Enron¡¦s went bankrupt, Enron¡¦s management had started transferring Enron¡¦s funding to personal accounts and made fake balance sheets, which provided investors information about how this company goes. (Gibney, 2005) These illegal actions, performed by certain individuals, finally led Enron to go bankrupt. These people¡¦s unethical behaviors such as CEO (Chief Executive Officer) of Enron, auditors and journalists caused Enron to go bankrupt, and therefore are responsible for Enron¡¦s bankruptcy.
If the most troubling aspect of Enron was the way in which its employees were treated losing jobs, stocks, health and retirement benefits in the wake of its dissolution, then it is possible to backtrack from this event to list the many problems provided by the men that ran the company that allowed for such a travesty to happen. The duplicitous, and in some cases outright iniquitous business practices of this
Enron’s greatest tool for concealing their debt and in the end was their ultimate demise was called “mark to market accounting” (oppel). “Mark to Market Accounting” is not totally illegal if it is done correctly which is acknowledging future sales and revenue with a new operation or business venture. What the Enron executives did was when a new natural gas plant was still in production they would predict that their new plant will generate them one hundred million dollars over the next ten years. However instead of just using this number as a future goal they would register this as revenue for that year. This would greatly increase their numbers and allow their stock to rise and profits to be divided among the top executives. To the outside world Enron appeared to be very successful and a great investment when in fact they were digging their own graves.
From the 1980s until now, there have been a lot of accounting scandals which were widely announced on by media. The result of this situation is many companies were bankruptcy protection requests, and closing. One of the most widely reported emulation of accounting scandals is Enron Company. Enron Corporation is one of the largest energy companies in the world. Enron was founded in Houston, Texas, America in July 1985 by the consolidation between Houston Natural Gas and InterNorth of Omaha, Nebraska (“Enron and Enderson: The story”, n.d.). According to
Enron was America’s seventh largest corporation. Enron rose to dramatic heights only to face a tremendous collapse. Enron was ‘America’s most innovative Company’ and it shocked the world by the biggest bankruptcy of that time. Enron was formed in 1985 following a merger between Houston Natural Gas Company and InterNorth Inc. of Omaha (Investopedia, 2016). Enron’s collapse affected lives of thousands of employees. When Enron was at lifetime high, it’s share prices were at $ 90.75, but that fell to a low of $ 0.67 in January 2002 following its bankruptcy (BBC News, 2002). It is really a wonder how such a powerful and innovative business disintegrated overnight and managed to dupe the regulators with the help of fake books of records and off the books transactions for such a long period of time. Enron presented the picture that it was a great Company with remarkable revenue however that was actually not the case, a huge part of Enron’s profit was fabricated. This was facilitated by masterfully designed accounting and morally questionable acts. Concealing losses contributed to a huge problem and by late 2001, the company was declared insolvent. There were countless factors which affected Enron’s journey to the top and its abrupt fall. In this case study, we will analyze the related party transactions that the company entered into which were questionable, evaluate the accounting firm’s logic and the errors and proposed rules to avoid any such fraud in future.
In 1985 after federal deregulation of natural gas pipelines Enron was formed through a merger of Houston Natural Gas, and Nebraska pipeline company Internorth. Enron went on to create energy derivatives and in 1990 formed Enron Finance Corp. By 1996 Enron had also formed Enron Capital and Trade Resources increasing their growth from $2 billion to $7 billion and increasing division employment from 200 to 2,000. In 1999 Enron entered the technology market by creating Enron Online (EOL). By August of 2000 Enron stock hit its zenith at $90.56/share and the firm was widely admired and emulated. Behind the scenes Enron faced increasing market competition and energy prices began to decline as the world economy entered into a recession. Enron began to use related party transactions and special purpose entities (SPEs) to obscure the firm’s leverage ratios in order to maintain their credit rating. It would be the use of the SPEs that eventually cause Enron to materially restate their financials resulting in their insolvency and demise in 2001 (Thomas, 2002).
Moreover, we know that ENRON has been buying a big number of ventures that looked promising. We know that ENRON has also been creating off balance sheet entities in order to remove the risk of their financial statements. Because of market-based accounting explained above, ENRON recorded all time high revenues. The company thus wanted to be involved in other areas. For instance, ENRON was buying or developing an asset – such as a pipeline – and then was expanding through a vertical integration (buying a retail business around that pipeline). This strategy required huge amounts of initial investments and was not going to generate earning or cash flow in the short term. If ENRON elected to present this strategy on its financial statements, it would have placed a big burden on the company’s ratios and credit ratings, and credit ratings investment grade was crucial for ENRON energy trading business. In order to find a solution to this issue, ENRON decided to look for outside investors who would like to make those deals with
Enron conducted several fraudulent record keeping practices to keep mounting debt off their financial statements. Initially, Enron kept complex financial statements that were confusing to both its shareholders and analysts. This was the first step to cover-up and misinterpret its debt and earnings. However, as Enron’s practice grew and became more involved, Jeffrey Skilling pressured other Enron executives to “…create off-balance-sheet vehicles, complex financing structures, and deals so bewildering that few people could understand them.” (Elkind and
In additional, Enron used special purpose entities to fund or manage risk as well as achieve financial reporting objective (page 11, Paul, 2003). For example, when they wanted to remove a significant investment in their financial statement, they used one of its entities which were joint venture with them to acquire it (Chewco case, ISDA, page
SPEs are separate legal entities set up to accomplish specific company objective. They become a synonymous with Enron’s collapse because these entities were at the center of Enron’s aggressive accounting methods. SPEs were used by Enron to sell off assets. The SPE would pay for the contributed assets through a new debt or equity issuance. SPEs can serve as a legitimate business purpose, it is apparent the Enron used a large network of SPEs, with complicated speculations and hedges all conceal in heavy legal language to keep an massive amount of debt off the company’s balance sheet. Enron had hundreds of SPEs. Three of the Enron’s SPEs were made prominent throughout the legal process. Chewco, LJM2, and Whitewing. Chewco was established in 1997 by Enron executives in connection with a complicated investment in another Enron partnership with interest in natural gas pipelines. The LJM2
Enron, was the world’s largest energy company in 2001. Enron forerunner, Northern Gas Company was incorporated in Delaware on April 25, 1930. From this date through July 1985, Enron had hundreds of purchases and new sub-entity constructions when they acquired Houston Natural Gas Inc. (Kastantin, 2005). On April 10, 1986, the company changed its name to Enron Corporation. Enron was an interstate and intrastate natural gas pipeline company, then later in 1989 Enron started trading natural gas commodities (Sridharan, 2002). Enron became the largest natural gas mogul in the United Kingdom and the United States. Enron an energy company later became a risk management firm that was looking to trade from commodities to derivations and to have a large firm with few assets on its financial statements. The term allowed Enron to avoid risky trading operations and not to show their debt on the financial statements this term is Special Purpose Entities (SPE). The root cause of Enron is ‘asset-light’ strategy, SPEs, and off-balance-sheet financial that was Enron’s eventual failure (Sridharan, 2002). Andersen, which was Enron’s external/internal auditor, a consultant in non-audit and tax matter, that was approved to use
Enron‘s bankruptcy in 2001 was the largest in U.S. corporate history at the time. The bankruptcy filing came after a series of revelations that the giant energy trader had been using partnerships, called special-purpose entities (SPEs), to conceal