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Enron Scandal

Group Pioneer

SYAMIN AZLIN BINTI AHMAD TOHER (252624)

HAFIZATUL AMIRAH BINTI HILMI (255778)

NOOR FITRAH BINTI CHAZALI (256092)

AU CHYI YIH (261613)

JOSHUA NG SWEE WEI (261774)

16/05/2019

ENRON CORPORATION

INTRODUCTION

  • Formed in 1985 - Energy, commodities and services company
  • One of the world’s major electricity, natural gases, communication and gas pipelines company

Downfall of Enron

  • Mark to market accounting – investors were given misleading information because of the deviation in the estimations
  • SPE - to hide large amounts of company debt

WHAT IS SPE?

  • A legal entity created to fulfill narrow, specific or temporary objectives of a company

WHAT IS SPE?

  • A valid and legal way for companies to sell their sell assets

Enron Hide Debts

  • Use SPE to create cash inflow, but did not record the investments and other liabilities
  • Used outside investors to secure investment

HIDE DEBTS

  • Investors bear the risk of investment and used shares as collateral

continue..

  • Used large investment bankers to take loans - looked like hedging activities instead of debt
  • Share price drop - Enron losing money

HIDE DEBTS

  • Unable to cover loss using their stock

Why Enron Fall?

Illustrate the reason why Enron fall and way to prevent it.

WHY ENRON FALL?

Enron's Business Risk

Illustrate the risk arise that lead to material misstatement in Enron's financial statement.

Risk

Hardware and Data

Hardware and Data (Technology)

1) System failure

2) Viruses

3) Fraud

Unstable Price

Unstable Price

1) Intermediary disadvantage

2) Market affect revenue of Enron

High Leverage

High Degree of Leverage

1) Borrow through issue of shares

2) Never record liability

What should be done?

What should be done?

1) Board of Director (BOD) roles:

- Protect shareholder's assets and provide return on investment.

- Make important decisions which may affect shareholder's benefit.

- Held liable by their shareholder and other if they negligence in their duties.

2) Audit committee should improve the corporate governance.

3) In conclude: Should ban the SPEs

PRINCIPLE

PRINCIPLES

Rules-based accounting standards

Rules-based accounting standards

*a list of detailed rules that must be followed when preparation of the financial statements

*Increase the verifiability for auditors and regulators and a related reduction in litigation and reduced the opportunities for earnings management through judgments

Principle-based accounting standard

Principle-based accounting standard

*Providing a conceptual basis for the accountants to follow instead of a list of detailed rules

*Its general guidelines that define how classes of transactions should be reproduced a general term and how the accounting should mirror economic substance

*Allows the users to evaluate the objective consistency of the overall impact, more likely to provide flexibility and concept or idea to the accountants, and to result in transactions that reflect in their true economic substance.

Bright-line Rules

*Bright-line test, that is a law or standard that is intended to be unambiguous and prevent the subjective interpretation

*Very definite, it attempting to outline every accounting situation in detail and this will create entities and transaction that circumvent the intent of the rules

Bright-line rules

Dangers in removing the bright-line rule?

Dangers

*Yes,cause some problems with the conflict of interest arise in the company

*the substance over form can used to ensure that financial statement give a complete, relevant and accurate picture of transactions and events

Difficulties might be associated with such a change?

Changing towards more principles-based standard are many accountants still concern about the potential of litigation over their exercise of judgement in the absence of bright-line rules

What is "Run on the bank"?

Run On the Bank

when a large number of people or individuals withdraw their fund or money out of fear that it will become insolvent in the near future and was a liquidity crisis that generally occurs due to the lack of confidence in the company.

Are the analogy valid for both firm?

*Yes . Why?

Enron

*That because Enron’s employees who will lose their jobs and investor’s and creditor will suffer a large financial loss.

*Enron could have avoided bankruptcy. If only the investors did not dump Enron’s shares, the creditors did not refuse to lend more money and the company would not been forced into bankruptcy

*since the clients of Andersen loss confidence in the firm’s credibility and started to drop the firm because they either felt that the firm was involved in fraudulent activities, or that the mere appearance would damage their own reputation if they stay with Andersen.

*By the way, many clients of Andersen fired the firm as an external auditor.

*Enron’s issue can be avoided if not being brought up by the press media and Andersen could have survived his large multinational firm.

Andresen

Andersen and Enron are lack of integrity. How to prevent this irreparable image?

  • Worker have to act and remain independently in performing any duty

IRREPARABLE IMAGE

Example of unethical activities

EXAMPLE

Bribery

  • lose confident and faith to the auditor
  • unable to sustain future growth
  • thousands worker lose their career

We have to preserve our reputation

Build up networking

PRESERVE REPUTATION

Conduct task with high ethical, integrity and moral standard

Honest & keep our words to the client

AUDITOR 3 IN 1

Internal auditor - External Auditor - Consultant

AUDITOR 3 IN 1

  • Independence issue arises - Are they going to be biased or not?

POSITIVE IMPACTS

  • Increase audit realization - more efficient
  • Improve issues or situations

POSITIVE IMPACTS

  • Save time

NEGATIVE IMPACTS

  • Not be able to act independently
  • self - review threats

NEGATIVE IMPACTS

  • Familiarity threats
  • Advocacy threats

Making tough accounting decision is needed

ACCOUNTING DECISION

  • Every decision will effect audit firm image.
  • Need to provide value and excellent service worth the fee.
  • There could be hidden problem with the report – duplicate information

We can prevent it!!!

PREVENT

  • Audit firm should not compromise with the fees client offered – bribery
  • SEC should monitor & make sure audit firm obey the rules.

Restore public trust in the auditing profession and in the nation’s financial reporting systems

PUBLIC TRUST

What has been done?

1) Sarbanes-Oxley Act 2002 – To help protect investors from fraudulent financial reporting

2) Audit oversight board – Promote and develop an effective audit oversight framework

3) Revised by law - Not allowed to translate, reprint or reproduce, photocopying and recording without permission

What should be done?

What should be done?

1. Taken more steps to search for fraud

2. Improve auditing standards

3. Control relationship between auditors and audit form and audit firm

4. Disclose accurately financial statement

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