Free Case Study On Financial Analysis Of Enron Corporation

Published: 2021-06-22 00:39:17
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Category: Business, Finance, Company, Investment, Banking, Organization

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Introduction
The growth and demise of the Enron Corporation has received critical responses from across the globe. A company that claimed revenues of approximately $101 billion in 2000 had fallen from its grace a year later in 2001, when it declared bankruptcy. The rise and fall of the Enron Corporation came as shock to a lot of small and large investors. After scrutinizing the financial statements investigators found that the figures in the financial statements were artificially inflated in a systematic manner, which is now better known as the “Enron Scandal”. This scandal is believed to be the biggest Accounting scandal of all time. Enron enjoyed considerable growth and a strong reputation until it declared bankruptcy on December 2, 2001. However, even until August 2000 Enron’s shares were been traded at around $83 per share, but the value of a single share had slipped to $0.22 by the end of 2001. The role of the auditors where questioned as well during the investigation process, which will be discussed further. The internal shadowy activities along with the altered financial accounts ultimately led to the demise of this large corporation and its shares experiencing a record fall.
The Lack of Disclosure
The company was trying quite hard to have a good credit rating from established credit rating agencies such as Standard’s and Poor’s and Moody’s. For this purpose they eventually tried to increase the paper earnings as opposed to the hard assets, just to have a more acceptable Return on Assets Ratio. However, this move did not impress the credit rating agencies much. By mid 2001, investors also started questioning the integrity of the disclosures made in their financial statements. Over the course of the next few years, investigations carried out by the Securities and Exchange Commission as well as the US justice department found that Enron had substantially inflated their profits and had hidden their debts and losses to maintain their positive rating from the credit rating agencies.
Falling share prices
The amount of internal dealings and lack of disclosure topped with the volatile situation of Enron’s shadowy investments started taking a toll on the stock price. The share price eventually dwindled from $83 to $0.22 per stock in less than a year. Things turned bumpy when in August 2001 Jeffrey Skilling resigned as the CEO and Ken Lay took over. Between January and August of the same year Lay and Skilling jointly sold over $41 million of stocks whereas the other insiders also disposed around $71 million worth of stock. The firm suffered another major blow as an aftermath of the September 9/11 terrorist attacks, after which their stock prices slid to a low of $28 per share. Enron seemed to be sliding down into deeper trouble when they announced a loss of $618 million and a reinstatement, according to which the owner’s equity was written down by more than $1.2 billion on October 2001. BY November 2001, Enron admitted that the profits in their financial statements were inflated by more than $586 million dollar over the last 5 years.
The financial report discrepancies along with the formal investigation which was launched by the SEC further shattered the reputation of Enron after which their stock price continued to plummet downwards. On 28th November Enron’s lack of disclosure of its true financial figures caused it to be downgraded to junk status after which the stock price reached $0.26 on the 30th of November.
The Auditing Firm of Enron
Like any large organization, Enron also had an auditing firm to manage their accounts. In this case, it was Arthur Andersen LLP, a renowned auditing firm that had close ties with the Enron Company. The activities of the auditing firm were severely scrutinized as it not only managed the external auditing of Enron but was also strongly involved with the internal audits. A lot of people have questioned the credibility of its auditing procedures after which a criminal investigation was also followed. The firm also failed to disclose the fact that Enron did not state their losses in the financial statements which amounted to approximately $586 million.
Conclusion
The failure of ENRON can be attributed to multiple factors, but the absence of sound accounting practices has ultimately led to the demise of the organization. Although, their financial record did seem to align with the Generally Accepted Accounting Principles, their profits were significantly overstated whereas the loss that they faced over the years was completely written off from their accounts. Apart from this
the management of the organization seemed to be placing more efforts on their personal well-being than that of the entire organization, which further forced the company towards bankruptcy.
References
1. Historical Prices. (2012). Yahoo Finance. Retrieved on 2nd May 2012 from http://finance.yahoo.com/q/hp?s=ECSPQ.PK
2. Enron Annual Report. (2000). Retrieved on 2nd May 2012 from http://picker.uchicago.edu/Enron/EnronAnnualReport2000.pdf

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