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The Fall of Enron - Case Solution
The Fall of Enron - Case Solution
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11/2/2019 The Fall of Enron - Case Solution
who you believe are the most responsible for that crisis. Briefly justify each of your
choices.
3. Identify and list the governance principles and guidelines that were breached.
4. Can Audit firms truly be independent consultants?
5. Who was most affected by Enron’s Fall?
6. Identify and list five recommendations that have been made recently to strengthen
the audit function after Enron’s scandal.
1. Enron’s stock price began in 2000 trading around $43. By late-August, it reached
$90 – a 107% return in 8 months – and it closed 2000 at $83 – up 91% for the
year. While Enron was up 91% for 2000, the S&P 500 Index declined by about
10% during the year. Knowing what you know from the case, would you have
invested in Enron at the end of 2000? Why or why not?
Company Overview
This case analysis is focused on the fall of Enron, one of the largest Natural gas and
electricity companies in North America. Enron dealt with the development, production,
transmission and supply and marketing of natural gas and electricity worldwide. It also
served the emerging markets in futures and renewable energy. Enron in 2001 filed for
bankruptcy and their stock price greatly reduced.
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11/2/2019 The Fall of Enron - Case Solution
Kenneth Lay the CEO, and Jeffery Skilling, the President of Enron promised investors
ambitious profits to say the least. The company’s super normal growth was centered on
the deregulation of the sector yet most states had not done so. Enron spent a lot of
money lobbying for deregulation as it would greatly open their market.
Enron’s Executive board quite craftily attracted investors to put their money on
unstable business models. Most of these deals flopped and they concealed the true
performance of the company. They hyped their stock price to very unsustainable levels
with a large number of their shareholders suffering a great loss when their bubble
burst. Mr. Skilling resigned in 2001 and Mr. Lay resigned the following year while
Enron was on a sharp decline.
Investors were not made aware that Enron was failing. Losses were ‘creatively’
accounted for as new joint ventures and partnerships. This false accounting kept stock
prices high and some of the executives even sold some of their shares in the Company.
Suddenly the company announced losses and it came to light that it had been
erroneously reporting its earnings for several years. Their accountants the firm of
Arthur Andersen even went as far as destroying documents that showed damning
irregularities in Enron’s bookkeeping and financial reporting.
They failed to fulfill their duty to the public and investors who expected them to
objectively access the company’s stability in order to inform their investment in the
business. They were in breach of the Ethical Laws and Professional Accounting
Standards. They were sanctioned by Congress during their investigations into the case.
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11/2/2019 The Fall of Enron - Case Solution
Several politicians were corrupt and on several occasions are believed to have received
bribes from Enron in the advancement of their causes. No one was keeping the
accountants/auditors accountable and their word was generally held to be true. The
SEC authorization of Mark to Market Practices by Enron also enabled the
company to defraud many of their investors ‘legally’.
Corporate Governance
The board, management and other stakeholders all have defined roles, obligations,
rights and responsibilities outlined in corporate governance principles. Despite Enron
being lauded as one of the top five companies with the best corporate governance set
up, several governance principles were flagrantly breached. Some of these principles
are:
1. Independent auditors have authority over the audit of all the company affiliates
and divisions
2. The firm acts lawfully and ethically in dealing with shareholders
3. Proper procedures and control over management day to day operation
4. The external auditor is free from management influence
5. The firm’s financial operating and governance activities are reported to
shareholders in a fair accurate and timely manner
6. Proper accounting and auditing procedure have been followed
7. Detailed disclosure of the risks associated with the business
8. The financial and operating results of the company
9. Fees paid and the nature of new audit services performed by the auditors.
The principles were deliberately ignored for the growth prospect of Enron and making
the business profit oriented. Andrew Fastow & Jeffrey Skilling changed their business
strategy and they appeared to make Enron very profitable and innovative.
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The management of the company is to be blamed for this fiasco. Had it been they
were...
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