ITEM 1

a) Possible research idea – How to ensure that corporations don't falsify their financial
statements

– Investigation into unethical financial reporting and recordkeeping.

Problem statement

1. Describe how things should work.

If the current problem did not exist, Enron would cut its losses by not engaging in financial
misdeeds that would jeopardize the company's financial future.

Enron should report their true financial situation.

Explain the problem and state why it matters.

2.1 What is the problem? Hiding Enron’s debt status through structured finance.

2.2 Why it's a problem? This artificial profitability will prove to be an injustice to the
company's shareholders who have invested in its stock. To hide its piles of debt and toxic
assets from investors and creditors, Enron used special purpose vehicles (SPVs) or special
purpose organizations (SPEs).2.3 Why it’s important to solve it? By solving the problem
early enough certain outcomes would have been avoided. The

2. Explain your problem's financial costs.

The collapse of Enron, which had more than $60 billion in assets, resulted in one of the largest
bankruptcy cases in American history.

The Enron crisis brought attention to accounting and corporate crime because its stockholders
lost $74 billion and its employees lost billions in pension benefits in the four years leading up to
its bankruptcy. The bankruptcy of Enron in 2001 wiped off more than $60 billion in shareholder
value.

Enron was formerly regarded as a behemoth in the US energy market, but its stock plummeted to
$1 from its peak of $90.75 per share as a result of this exposure.
Back up your claims.
 3. Propose a solution.

Excessive leverage should be avoided by businesses. Enron's poor financial performance was
greatly exacerbated by its excessive use of leverage.
The following is the Liabilities and Shareholders' Equity section of Enron's year-end balance
sheet for fiscal year 2000.

Enron reported $11.5 billion in shareholders' equity and $65.5 billion in total liabilities and
shareholders' equity. A fast differential calculation yields $54 billion in total liabilities.

Some quick calculations reveal that Enron's debt-to-equity ratio was 4.7x, or
$54,000,000,000/$11,500,000,000.

Enron's leverage ratio of 4x+ is far higher than the leverage ratios of today's oil and gas
supermajors. Chevron, for example, is 0.34x while Eni SpA (E) is 0.81x.

Enron's debt was quite expensive due to its high leverage levels. Here's an example of the math.
In fiscal year 2000, Enron spent $876 million on interest. The corporation had $1.7 billion in
short-term debt and $8.6 billion in long-term debt at the conclusion of the same time period.

4. Explain the benefits of your proposed solution(s).

If Enron uses a lower equity multiplier, it means the company has less financial leverage. In
general, a low equity multiplier is preferable because it indicates that Enron is not taking on
excessive debt to finance its assets. The intangible benefit would be that it would enhance
investor trust in Enron, as investors prefer firms with a low equity multiplier, which suggests that
the company is financing asset acquisitions with equity rather than debt. Companies with a large
debt load may be financially dangerous.

5. Conclude by summarizing the problem and solution

b) Draft the most suitable research title for your study

Sample research title

Financial Ethics: A quantitative report on how unethical representation of financial
reports and records affects a company.