AUDIT STUDY CASE

ENRON
GHENU Cristina Iulia AL RASSI Haneen GHIGHILAN Alexandru

CONTENTS
Review of Enron Rise and Fall The cause of Enrons bankruptcy and scandal Conclusions causes and consequences Reforms Following Enrons Collapse

Review of Enron Rise and Fall

Enron Corporation was an American energy, commodities and services company located in Huston, Texas . It employed approx. 21.000 people by the middle of 2001, right before it went bankrupt.

As one of the worlds leading electricity, natural gas and communication 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 facilitate online business.

 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 mid2000 to less than $1 per share at the end of 2001, caused shareholders 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.

The cause of Enrons bankruptcy and scandal

The lack of truthfulness coming from the management about the health 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.

 The stock was sold to the company to repay money that the CEO owed Enron - and the sale of company stock qualifies as exception under 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 roles played by Arthur Andersen - as auditor but also as consultant to Enron 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 third quarter of 2001 caused regulators and the media to focus extensive attention on Andersen.

The magnitude of the alleged accounting errors, combined with Andersen's role as Enron's auditor and the widespread media attention, provide a seemingly powerful setting to explore the impact of auditor reputation on client market prices around an audit failure.

 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 longterm 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.

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 strategy pursued by Enron presumably under the advisement of its business consultants, McKinsey and Company. There are many levels of blame in this corporate crisis. Enrons top managers are clearly responsible for poor business decisions and mismanagement of the corporation. Enrons collapse also might have been averted had there been a truly independent and objective review of its financial statements by its auditors. Securities laws in the U.S. require independent auditors to obtain reasonable assurance that the financial statements are free from material misstatement. But not the last, Enron could not succeeded without the cooperation of its bankers and trading partners who helped finance its operations such as: elaborate strategy of tax avoidance.

Reforms Following the Enron Collapse

Following the collapse of Enron, Senators Corzine and Boxer proposed 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 to identify methods to strengthen Americans retirement security. This task force, composed of Commerce, Labor, and Treasury Department members, will closely examine the potential problems related to employers restrictions on portfolio diversification and employees sale of stock.