Using Modified Altman, Chanos, Beneish; Examine Enron Corporation for 1997, 1998, 2000 & 2001 Show as to How Early Financial Fraud Could Be Identified
Using Modified Altman, Chanos, Beneish; Examine Enron Corporation for 1997, 1998, 2000 & 2001 show as to how early financial fraud could be identified
Introduction
The history of Enron corporation can be traced to the 1930s when the Northern Natural Gas Company, was formed in order to transport and market gas. The company formerly known as Northern Natural Company changed several times, as it made significant transformations in portfolio of its business activities and name. In 1980, Northern Gas Company became Inter North Inc, and then Enron Corporation in 1986. By the time Enron filed for bankruptcy the extent of its transformation and scope was so extensive that it was effectively overtrading. According to Tebogo (2011), Enron had around 3,500 foreign and US based subsidiaries and affiliated companies, which represented a huge holding, to be effectively controlled and managed. This rapid expansion led to the accumulation of a large amount of debt which was not effectively applied to yield returns thereby, increase the financial risk and bankruptcy risk of the company. The management of company in their quest to convince shareholders connived with Auther Anderson an auditing firm to engage in big bath accounting. By so doing, Enron came up with a strategy of a minimum $1 billion in annual profitability and a double growth rate of about 15%. In addition, the management adopted radical tactics such as selling energy contracts, called “prepays”, which facilitated the collection of cash before natural gas or related products were delivered. Enron further used hedging techniques to protect itself against uncertainty surrounding the long term energy contracts, and even pooled energy contracts in order to securitize and trade them as bond stocks. Moreover, it carried out a systematic policy of disposing off assets where management felt that the returns were not sufficiently high.
The disposal was, however, effected by selling the assets to Special Purpose
Introduction
The history of Enron corporation can be traced to the 1930s when the Northern Natural Gas Company, was formed in order to transport and market gas. The company formerly known as Northern Natural Company changed several times, as it made significant transformations in portfolio of its business activities and name. In 1980, Northern Gas Company became Inter North Inc, and then Enron Corporation in 1986. By the time Enron filed for bankruptcy the extent of its transformation and scope was so extensive that it was effectively overtrading. According to Tebogo (2011), Enron had around 3,500 foreign and US based subsidiaries and affiliated companies, which represented a huge holding, to be effectively controlled and managed. This rapid expansion led to the accumulation of a large amount of debt which was not effectively applied to yield returns thereby, increase the financial risk and bankruptcy risk of the company. The management of company in their quest to convince shareholders connived with Auther Anderson an auditing firm to engage in big bath accounting. By so doing, Enron came up with a strategy of a minimum $1 billion in annual profitability and a double growth rate of about 15%. In addition, the management adopted radical tactics such as selling energy contracts, called “prepays”, which facilitated the collection of cash before natural gas or related products were delivered. Enron further used hedging techniques to protect itself against uncertainty surrounding the long term energy contracts, and even pooled energy contracts in order to securitize and trade them as bond stocks. Moreover, it carried out a systematic policy of disposing off assets where management felt that the returns were not sufficiently high.
The disposal was, however, effected by selling the assets to Special Purpose