Accounting and Finance are two important things from the standpoint of an organization and both of these concepts found exceptionally wonderful as far as operating an organization is concerned (Warren, p.119). Organizations usually have number of departments under one roof and every department is held responsible to play its part for the economic prosperity of the company. Accounting is the name of recording and interpreting the day to day transaction of an organization, while finance is the name of utilizing the funds of a company at an appropriate place from where the likelihood of earning would be on a high node (Warren, p.121).
Inevitably, there are number of concepts which specifically associated with Accounting and Finance and all of these concepts deem important and favorable for a company as a whole. Among number of things and provisions, the name of auditing is one of them, which has its own recognition and importance in a broad nutshell. The theoretical meaning of auditing is to double check the things accordingly. The main objective of this assignment is to analyze the importance of Auditing while answering some major questions relates to a specific company. The organization which has been supposed in this analysis is Enron Company. There are 9 different questions that need to be answered in this particular assignment accordingly and every question has to be answered in a professional and well organized manner in total. The answers related the same are mentioned below,
- Brief Introduction about the Company: Enron
Enron was an American leading company engaged in offering their services in diverse field like energy, trading and other service internationally. The company came into existence in the year 1985 through a merger of private companies in Houston and then became the dominating pipeline distributor across the US. During the mid of 1990s, Enron set up power generation companies, both in the U.S. and global markets. Kenneth lay, who was the chairman of Enron, was formerly recognized as the chief executive officer in Houston Gas Company (Fox, p.12). The primary industry in which the entire operations of Enron company lies are predominantly associated with the energy industry. However, the company started to extend their business dimensions towards the next level in 1999, by duly initiating its communication services division and launch its official website for online trading of merchandise which was then considered as world’s largest online platform for business trading within a limited frame of time. The company used to generate 90% of its earnings from its online source of Enron business trading. The company’s products and services that were based on different sectors were usually pertaining to energy excluding online operation which was a great strategic move to further enlarge their functions in competitive economy. The service package is comprised on:
- Online energy marketplace services
- Broadband services
- Energy services
- Wholesale services
All ranges of services were successfully driven and gained elevated returns which placed the company as the seventh largest company on the fortune 500 and sixth leading energy company throughout the globe. The growth of Enron was its peak in the year 2000 by claiming annual turnover of $10 billion and their share price was accelerated to $90. Enron was taken as a business phenomenon for many other entities as the financial health of the company was very strong and attention grabber. The company has employed over 20,000 workforces and being the largest energy company, its financial stability was also considerable. The Countdown for Enron Company began at the end of 2001, when their financial statements were reported as uphold in a substantial manner. This was a well organized accounting fraud that was originated and a collaborative work of management and an auditing firm which became the reason of the company’s insolvency. The history indicates this fraud as Enron scandal. Since then, the company has become an eminent model of willful corporate fraud and corruption. This corruption raised many problems for the accounting practice and activities that were carrying out in many organizations in the US. After evaluating all the aspects of corruption, the creation of Sarbanes–Oxley Act of 2002 had been formulated in order to avoid certain accounting fraud in future. The scandal has also led to the dissolution of Arthur Andersen accounting firm and affected the larger business world as well (Jesse Russel, p.72). The rapid collapse of Enron leads the 21,000 employees at the prospect of leaving doubts and eliminated holdings of stock investors within a while, including some large mutual funds. Enron’s share that sold at a price of $90 was then tumble to less than $1 which is a big example for every multinational companies to avoid committing any financial frauds.
- Listing Down the name of CEO, CFO and other Key Personnel
The list of the key personnel for Enron Company are mentioned below in the bullet points,
- The Founder of the Company was Mr. Omaha Nebraska who invented the company in the fiscal year 1985 and apart from them; Kenneth Lay was also among the founders of the Company
- Kenneth Lay also worked as the Founder, Chairman and the Chief Executive Officer (CEO) of Enron Company
- Jeffery Skilling was the former President of the company and Chief Operating Officer (COO) of Enron
- Andrew Fastow was giving their services to the company as Chief Financial Officer (CFO)
- Rebecca Mark Jusbasche was the former Managing Director and Vice Chairman of the Company. He also hold a position of CEO on Enron International
- Stephen F. Cooper was the Interim CEO and Chief Reporting Officer (CRO) of the company
- Share Capital Structure of the Company
The essence of capital structure deems extremely important and vital for an organization in total and the importance of this particular thing cannot be denied from any aspect. Capital structure could also be formed in the proportion of Debt & Equity, while it is also found in Share Capital as well.
Likewise the stance of shareholders are important for an organization, the essence of share capital is essential in the same way as it analyzes that how much amount the company is having from their external shareholders and what is the amount is associated with the pure capital of the owner. In this particular section, it is required to cover down the share capital structure of the company.
According to the financial statement of Enron for the year 2000, the share capital of the company has been divided into three categorize which predominantly are, common stocks, preferred stocks and convertible junior preferred stocks.
Around 1,370,000 Second Preferred Shares have been issued by the company which has a total worth of $ 124 million, while the worth of mandatorily convertible junior bonds is $ 1000 million. There are 1,200,000,000 common shares have been issued by the company which has a net total worth of $ 8,348 million in total, hence the total shareholder’s capital or equity of the company in the fiscal year 2000 was US$ 11,470 million which was quite high.
- Business History of the Company along with its Remarkable Achievement
The predecessor of Enron was the Northern Natural Gas Company (NNGC), formed initially in the year 1932 in Omaha, Nebraska. The company was recognized in the year 1979 as a main subsidiary of a Holding Company which was basically a Diversified Energy and energy related Product Company. Internorth was among the major businesses for the production of natural gas, transmission, production and marketing for natural based gas liquids. The company owned a Peak Antifreeze and Eval resins merely for the food packages. In the year 1985, the group has bought the smaller and less diversified company with the name of Houston Natural Gas (HNG).
The initial name of the company was HNG and InterNorth Inc. From Omaha, the company moved its corporate location to Houston and after that period, Enron began to sell major assets such as the chemical based divisions, Northern PetroChemicals and others.
Before the bankruptcy of the company, the major achievement of the company lies in the fact that it was increasing with a robust pace in different parts of the world, like Mexico, Jamaica, Vietnam and India as well. The company received an award of Distinguish Public Services from Rice University in contributing the public based services. It was counted among the most effective and profitable companies of the world, in which shareholders of almost every country have intentions to invest.
- Auditor of the Company Before it get Failed
The stance of auditing is extremely important from the viewpoint of an organization. The theoretical meaning of auditing is double checking and it is one of the most vital strategies for an organization. Organizations hire auditors merely to check all of their financial records and analyze that whether or not they are complying with the applicable accounting standards. Every company in the world has hired some professional auditors who will initiate audit on their certain checklist and apprise the management that how much they are complying with the standards and how much not!
There is a requirement to hire either a firm of independent accountants for initiating the stance of auditing of a certain company. Likewise other companies, Enron also has someone to audit their accounts. According to the annual report of 2000, just one year before the shutting down of the company, the annual report of the company audited by independent public accountants of the United States and concluded that the company was adhering with the Generally Accepted Accounting Principle (GAAP), which will certainly bring positivity for the company as a whole.
- Explanation with Statistics with Reasons to the Business Failure
The insatiableness of individuals is the thing which pushed most of the companies towards severe distress and failure and one of the true and dominating example of the same found during the failure of Enron Energy. During the fiscal year 2001, a high series of revelations which involves irregular and ineffective accounting based procedures which bordering on the fraud perpetrated throughout the fiscal year 1990. Enron suffered the largest example of bankruptcy. According to the analysis, it is found that it was initiated due to manipulation occurred in the financial statement of the company and due to that scandal, share price of company decreased by more than US$ 90 per share.
Manipulation occurred due to the involvement of CFO, Auditors and other top brass of the company. The management of the company manipulated the accounts by $ 27 billion merely to attract new investors towards the company and caught red handed. The executives were hiding the losses from the shareholders and the shareholders are totally unaware with the fact completely. Enron was among the list of blue chip share before this menace, but unfortunately, got a perilous jolt due to this particular act. Enron became one of the major parts of Ponzi scheme, in which Bernard Mad-Off was also there in the punishment of manipulating the accounts.
- Responsible for the Failure
There must be a hand involved in almost everything which an organization does or strategizing to do. Though, there are number of people work in an organization, but there are some certain ones who have the direct link with the decision making stance of the company and they are regarded as top management of the company. Top management has the authority to take any decision for the betterment of the company but sometimes, due to greed their decisions would make the life of the organization miserable. A similar phenomenon has been found in the failure of Enron as well, in which the top brass of the management was involved.
Obviously, subordinates or lower level of employees have nothing to deal with the accounts of the company. Neither they have any access of the same nor can they take any decision. There are a number of people who could be held responsible regarding that tragic failure of Enron. The executive class of the company, including Chief Executive Officer, Chief Financial Officer and Chief Reporting Officer (CRO) who manipulated the accounts of the company on their own wish merely to attract number of investors from all over the world, which was an unethical thing to do at this stage.
- Risk That were Involved
Risk is the most important thing from the standpoint of an organization and it is the thing which cannot be denied from any aspect. Risk is the name of uncertainty or the probability of loss anything and this is something which cannot be forgotten from any angle. An organization, during their corporate move analyzes different amount of risks altogether, which predominantly are Interest Rate Risk, Credit Risk, Control Risk, Operational Risk and others. Every company in this world has had faced some sort of risk during their corporate life and the same stance has been applicable on Enron as well.
The most dominating type of risk associated with this particular type was the credit risk because the company was running out cash and requires high amount of investment in total. Apart from the Credit Risk, the risk associated with Interest Rate (IR) is also important for the company because due to their financial scandal, no company or even the government was intending to give sufficient amount of loan or bailout package (BOP) for its survival. We would include the Credit Risk (CR) in our audit plan, because this is the most important audit risks which have been confronted by the management of Enron in total. The major reason of the collapse of this business has been mentioned in the above sections and it is required to overcome on these issues to be arising in future and we should not see such corporate failures in futures.
- Appointment as an Auditor
All of the main and potential causes of the failure of the company have been mentioned in the above sections, and it is found that all of these reasons were more than enough to push a highly profitable business into a pit. We cannot accuse the management solely for that event, as there are certain proportion of the auditors as well, because if they hadn’t allowed Enron’s management then such things would not be happen.
If I be the Auditor of the company, then there are certain steps which I would be taking to strengthen the financial competitiveness of the company along with pushing the company towards adhering to different financial standards. I have three control suggestions which I will implement on Enron, if I be the auditor of the company (External)
- First of all, all the authorities of the management would be revised, like if the management is intending to take a big decisions, then they have to take permission from the shareholders of the company and if they allow, then they can take decisions
- The record of every transaction should be present in both soft and hard copy form and make sure it must be complying with the given financial standards
- An individual who has a high position in the company should not be engaged in any other activity of the same company or with any other company operating in the same line of business.
There are certain concepts, which comes under the ambit of Accounting itself, and among them, the name of Auditing is one of them. Theoretically, Audit means to double check and it is one of the most important and essential things stride under the field of accounting on which the entire productivity and financial competitiveness of an organization depends upon in total. Auditing is one of the most important things that come under the umbrella of Corporate Governance. The organization which has been supposed in this analysis is Enron Company. From the entire analysis, it is found that upper management was involved behind the corporate failure or collapse of the company, in which they manipulated the accounts of the company merely to attract high number of investors from all over the world and such practices should be banned through effective compliance of audit based standards in order to prevent such things happening in the future.
Fox, Loren. Enron: The Rise and Fall. Washington: John Wiley & Sons, 2004.
Jesse Russel, Ronald Cohn. Enron Scandal. Miami: Book on Demand, 2013.
Warren, Carl S. Financial & Managerial Accounting, 12th ed. New York: Cengage Learning, 2013.