audit study case.pptx

7/27/2019 AUDIT STUDY CASE.pptx

1/9

AUDIT STUDY CASE

ENRON

GHENU Cristina IuliaAL RASSI Haneen

GHIGHILAN Alexandru


2/9

CONTENTS

Review of Enron Rise and Fall

The cause of Enrons bankruptcy and scandal

Conclusions causes and consequences Reforms Following Enrons Collapse


3/9

Review of Enron Rise and Fall

Enron Corporation was an American energy, commodities and servicescompany located in Huston, Texas .

It employed approx. 21.000 people by the middle of 2001, right beforeit went bankrupt.

As one of the worlds leading electricity, natural gas andcommunication companies, they offered:

marketed electricity and natural gas

they delivered physical commodities

offered financial and risk management services

developed an intelligent network platform in order to facilitateonline business.


4/9

Before it went bankrupt in late 2001, its annual revenues

rose from about $9 billion in 1995 to over $100 billion in

2000.

Enron's drop in stock price from $90 per share in mid-

2000 to less than $1 per share at the end of 2001, causedshareholders to lose nearly $11 billion.

Enron revised its financial statement for the previous five

years and found that there was $586million in losses.

Enron fall to bankruptcy on December 2, 2001.


5/9

The cause of Enrons bankruptcy and

scandal

The lack of truthfulness coming from the management about thehealth of the company was a first step.

The senior executives had to protect their reputations and their

compensation

There is no evidence that when Enrons CEO told the employees that

the stock would probably rise or if he also disclosed that he was

selling stock.

The investigation surrounding Enrons bankruptcy enabled

shareholders to learn of the CEO stock sell-off before February 14,

2002 which is when the sell-off would otherwise have been disclosed.


6/9

The stock was sold to the company to repay money that the CEOowed Enron - and the sale of company stock qualifies as exceptionunder the ordinary director and officer disclosure requirement.

It does not have to be reported until 45 days after the end of the

companys fiscal year.

It has been suggested that conflicts of interest between the two rolesplayed by Arthur Andersen - as auditor but also as consultant toEnron and a lack of independent oversight of management by

Enron's board contributed to the firm's collapse.

The revelation of accounting irregularities at Enron in the thirdquarter of 2001 caused regulators and the media to focus extensiveattention on Andersen.

The magnitude of the alleged accounting errors, combined withAndersen's role as Enron's auditor and the widespread mediaattention, provide a seemingly powerful setting to explore theimpact of auditor reputation on client market prices around an audit

failure.


7/9

As a public company, Enron was subject to external sources of

governance including market pressures, oversight by government

regulators, and oversight by private entities including auditors, equity

analysts, and credit rating agencies.

In order to keep appeasing the investors to create a consistent

profiting situation in the company, Enron traders were pressured to

forecast high future cash flows and low discount rate on the long-

term contract with Enron.

The difference between the calculated net present value and the

originally paid value was regarded as the profit of Enron.

In fact, the net present value reported by Enron might not happen

during the future years of the long-term contract.


8/9

Conclusions

The failure of Enron was a result of a combined failure on several fronts.

It was a failure of the high-risk, asset light business and financial strategypursued by Enron presumably under the advisement of its businessconsultants, McKinsey and Company.

There are many levels of blame in this corporate crisis. Enrons topmanagers are clearly responsible for poor business decisions andmismanagement of the corporation.

Enrons collapse also might have been averted had there been a trulyindependent and objective review of its financial statements by itsauditors. Securities laws in the U.S. require independent auditors to obtain

reasonable assurance that the financial statements are free from materialmisstatement.

But not the last, Enron could not succeeded without the cooperation of itsbankers and trading partners who helped finance its operations such as:elaborate strategy of tax avoidance.


9/9

Reforms Following the Enron Collapse

Following the collapse of Enron, Senators Corzine and Boxerproposed a twenty percent limit for any one stock that can be

invested in any single 401(K) plan.

President Bush called for the creation of a task force toidentify methods to strengthen Americans retirement security.

This task force, composed of Commerce, Labor, and Treasury

Department members, will closely examine the potentialproblems related to employers restrictions on portfolio

diversification and employees sale of stock.

audit study case.pptx

Documents