REPUBLIC CENTRAL COLLEGES

Angeles City
Prelim Quiz

Name: Shiori B. Bano

Course & Year: BSA - III

Gather data about the corporate scandal of Enron and answer the following.

1. Discuss the company’s background. (10%)

Enron Corporation is a merger between Houston Natural Gas Company and

Omaha-based InterNorth Incorporated and it is an American energy, commodities, and
services company that was founded in 1985. Its CEO and chairman Kenneth Lay, was a
former CEO of Houston Natural Gas. By 2000 it was the seventh largest U.S.
corporation. It employed around 29,000 staff and was a major electricity, natural gas,
communications and pulp and paper company, with claimed income of almost $101
billion during 2000 before it was bankrupt on December 3, 2001.

2. What went wrong? (35%)

In order for Enron to conceal its fraud and financial losses, it applied
institutionalized, systemic and creatively planned accounting fraud regarding its
company’s financial statement, which was well renowned as the Enron scandal.
Independent partnerships to which Enron sold assets were formed, the reason for Enron
to engage with these special-purpose entities is to convert significant liabilities from
Enron's financial statements into revenue. Its purpose was to make Enron appear more
profitable than it really was. But these kinds of tactics just created a dangerous
consequence for Enron because in order to sustain its company’s progress, its corporate
officers would have to continuously make financial frauds that will make the illusion of
billions of losing money into imaginary profit. In 2001, after a chain of leaks about the
fraudulent accounting procedures executed since the 1990s relating to Enron, it filed for
one of the largest bankruptcies in history, resulting in $11 billion in shareholder losses.
Its share price dropped from US $90.56 during the summer of 2000, to just pennies.

3. What were its consequences? (25%)

Enron filed for Chapter 11 bankruptcy protection on December 2, 2001. Its

scandal greatly affected the greater business world by initiating the dissolution of its
primary auditor through its years which was the Arthur Andersen accounting firm. Arthur
Andersen was also accused of obstructing justice since it abolished the documents
regarding the case after the Securities and Exchange Commission started to investigate
Enron in late 2001. Sooner Andersen lost a majority of its clients arising from the severe
damage to its reputation that it was forced to dissolve itself. Enron 20,000 employees
were ruined in varying levels because its 62% of the entity pension plan is currently
insignificant stock of Enron. Criminal offences were charged to more than 30 people
emerging from Enron’s deceitful practices. Many Enron executives were accused of a
variety of charges and were later sentenced to prison including its chairman, president,
chief financial officer. Its chairman and CEO Kenneth L. Lay, died in 2006 before being
 sentenced and his conviction was then vanished. In addition to federal lawsuits,
hundreds of civil suits were filed by shareholders against both Enron and Andersen.

4. What were the solutions applied? (15%)

To solve its humongous delinquent problem, Enron sold its domestic pipeline
companies like CrossCountry Energy for $2.45 billion and eventually sold other assets to
Vulcan Capital Management, making Enron asset-less. Throughout early 2007, it was
then renamed to Enron Creditors Recovery Corporation that aims to recompense the
previous Enron's residual creditors and to put an end to Enron's dealings. Its newly
elected board of directors prosecuted 11 financial institutions which were the accomplice
of Lay’s, Fastow, Skilling and others in hiding Enron's accurate financial condition. A
variety of financial institutions indemnified hundreds of millions in fines and penalties for
the parts they performed in financing and setting up the independent partnerships that
contributed to Enron's collapse. Although the firms paid more than $7 billion to repay
creditors and investors, it wasn’t enough as Enron owed its creditors more than $70
billion during its gradual fall in the business. New regulations and legislations were
created that were focused on increasing the precision of financial reporting for publicly
traded companies because of the Enron scandal. The most significant of this was the
Sarbanes-Oxley Act (2002), which imposes strict penalties for abolishing, forging, or
fabricating financial records. The act also proscribed auditing firms from doing any
concurrent consulting business for the same clients.

5. If you are one of the directors how would you run the company to avoid the problems
incurred? (15%)

The main problem in the Enron scandal was the continuous fraudulent
accounting practices, so as to avoid this primary delinquent, maintaining internal controls
is a must. It’s an effective way to prevent fraud as I will restrict the access to financial
data and checking of the audit logs. I will replace the deceitful auditing firm that was
contributing to the unlawful practices with the honest and effective auditing firm available
to perform its services in good faith. Avoiding financial institutions that have the intention
to mask the fraudulent actions in order for them to later on benefit from, is also a part of
my action. Converting losses into an imaginary profit was not the best remedy to deal
with the incurred losses. Although it’s the fastest way to resolve the problem, it will
eventually result in bigger problems. A best practice of good management of the
company will help to remove the losses and turn it into profit. Being ethical in all aspects
will make the company keep in track, challenges will be thrown but wise decision making
will overcome those struggles. Not only do I deal with all the problems of the company,
as a director I will also seek help from my colleagues and experts.