Question 1
The accounting firm colluded with Enron to commit financial statement frauds through the use of special purpose entities (SPEs) and mark-to-market accounting. Enron was formed in a period when deregulation was being implemented in the industry to facilitate transparent access to energy from energy organizations (Connell, 2017). To take advantage of the deregulation, Enron changed its accounting procedure with the formation of SPEs. SPEs allowed organizations to separately report the assets and liabilities of the SPEs and the main company. Enron took advantage of the deregulation and used SPEs to hide its debts by keeping them off the company’s balance sheet and putting them on the SPEs balance sheet (Connell, 2017). Besides, while the Security and Exchange Commission (SEC) allowed the use of mark-to-market accounting on one area of their business, Enron used the method for all areas of its business. Arthur Andersen, which managed the internal audit functions of Enron, was selected as the external auditor to approve Enron’s practice (Connell, 2017). With Enron being its biggest client, the accounting firm was forced to approve the practice. Besides, despite the advice against the creation of another SPE by a professional standard group, David Duncan, the lead Andersen partner, approved the creation of a new SPE due to Arthur Andersen’s reliance on Enron as its biggest client.
Question 2
The creation of the Sarbanes-Oxley (SOX) Act of 2002, through its requirement for internal control, autonomous external auditors, and protection of whistleblowers, can adequately prevent a repeat of the Enron scandal. The independence between auditors and the companies being audited has helped prevent collusion in financial statement fraud. In addition, the requirement for any publicly-traded company to have an audit committee has helped maintain internal control (Connell, 2017). The responsibility of the audit committee to oversee financial reports and disclosures ensures that the policies and procedures put in place to prevent unethical financial practices are followed. Furthermore, the Sarbanes-Oxley Act gives CEOs and directors additional responsibility to certify the accuracy of financial reports (Connell, 2017). The potential punishment of between 10 and 20 years in prison for executives who knowingly or willfully certify false reports has helped increase corporate integrity and credibility.
Delegate your assignment to our experts and they will do the rest.
Question 3
The two aspects of the Sarbanes-Oxley Act of 2002 include the Corporate Responsibility for Financial Reports and the Management Assessment of Internal control. The first provision, which is covered in SOX Section 302, entails the requirement of companies’ senior management to certify the validity of the organizations’ financial statements (Connell, 2017). The section requires the senior management to certify that the signing officer has reviewed a financial report and ensured that it does not have any untrue statement. Also, the section outlines the signing officers’ responsibility of maintaining and implementing internal control. On the other hand, the second provision, which is covered in SOX Section 404, outlines the necessity of internal controls within an organization (Connell, 2017). According to the section, a company should have a report that analyzes the responsibilities of management in maintaining internal controls structure and procedure for financial reports, provide assessment for internal control, and the public accounting firm that audits the organization.
Question 4
Liquidity Analysis
| 2000 | 1999 | |
| Current Assets | 30,381,000,000 | 7,255,000,000 |
| Current Liabilities | 28,406,000,000 | 6,759,000,000 |
| Current Ratio= | 1.070 | 1.073 |
The current ratio is a measure of an organization’s ability to meet its short-term obligation. A current ratio that is greater than 1, as evident in Enron’s 2000 and 1999 current ratio, shows that an organization is able to pay its short-term debts.
| 2000 | 1999 | |
| Revenue | 100,789,000,000 | 40,112,000,000 |
| Average Account Receivable | 12,270,000,000 | 3,548,000,000 |
| Receivable Turnover = | 8.214 | 11.306 |
The account receivable turnover is a measure of an organization’s effectiveness in collecting credit sales, with a high ratio showing good financial and operational performance. Although the ratio reduced between 1999 and 2000, it is still high, showing an efficient business operation with strict credit policies.
Solvency Analysis
| 2000 | 1999 | |
| Total Debts | 10,229,000,000 | 8,152,000,000 |
| Total Assets | 65,503,000,000 | 33,381,000,000 |
| Debt-to-asset ratio = | 0.156 | 0.244 |
An ideal debt-to-asset ratio should below 1, as in the case of Enron in 2000 and 1999. The ratio shows that the organization has more assets than its debt.
| 2000 | 1999 | |
| EBIT | 2,482,000,000 | 1,995,000,000 |
| Interest Expenses | 992,000,000 | 791,000,000 |
| Times Interest Earned = | 2.502 | 2.522 |
Times Interest Earned is a ratio showing the number of times a company can settle its interest using EBIT. The greater the ratio, the better the position the company is. Although Enron can meet its interest obligation, the ratio is not very high.
Profitability Analysis
| 2000 | 1999 | |
| Profit Margin = | 0.010 | 0.022 |
| Earnings per share = | 1.202 | 1.161 |
Based on the profit margin, the organization lacks steady profitability; the organization is struggling to achieve good sales. On the other hand, the basic earnings per share show that the organization allocates $ 1.202 and $1.161 company profit to each individual stock (Enron Corporation, 2001). Therefore, the profitability analysis shows that the company is struggling to make a profit for its stockholders.
References
Connell, M. (2017). The Fall of Enron and the Creation of the Sarbanes-Oxley Act of 2002.
Enron Corporation. (2001). 2000 10-K form. https://www.sec.gov/Archives/edgar/data/1024401/000102440101500010/ene10-k.txt
