Enron Corporation and Anderson case study
4.1 Enron Corporation and Anderson, LLP
----Analyzing the fall of two Giants
This case results in the publishing of Sarbanes-Oxley Act of 2002 and relevant to the Securities and Exchange Commission. Also, it is related to SAS 103: Auditing, Quality Control, and Independence Standards and Rules.
[1] What were the business risk Enron faced, and how did those risks increase the likelihood if material misstatements in Enron’s financial statements?
The business risks Enron faced are as following:
• Using complex business model
• extensive using special purpose entities
• using untraditional ventures to expand business rapidly
• limitations in GAAP
The complex business model used in Enron lead overstate its revenue while not disclose the exact value of debt. Numbers of special purpose entities are used to keep debt off the books. The untraditional ventures incense the business expansion rapidly and risky. Also, the limitation of GAAP makes it possible that management took advantages of complex standards to hide the actual economic substance. All of these above increase the likelihood of material misstatements in Enron’s financial statements.
[2] (a) What are the responsibilities of a company's board of directors? (b) Could the board of directors at Enron—especially the audit committee—have prevented the fall of Enron? (c) Should they have known about the risks and apparent lack of independence with Enron's SPEs? What should they have done about it?
The responsibilities of a company’s board of directors include:
• Protect the shareholders’ assets and provide a return on investment
• Make important decisions that affect shareholders (dividends)
• Decide on which executives to hire / fire
The fall of Enron could have been prevented by the board of directors. The board should responsible for the company's financial reports. However, they are failed to disclose the off books liabilities to the public, which led the Enron fall. What is more, the board and
----Analyzing the fall of two Giants
This case results in the publishing of Sarbanes-Oxley Act of 2002 and relevant to the Securities and Exchange Commission. Also, it is related to SAS 103: Auditing, Quality Control, and Independence Standards and Rules.
[1] What were the business risk Enron faced, and how did those risks increase the likelihood if material misstatements in Enron’s financial statements?
The business risks Enron faced are as following:
• Using complex business model
• extensive using special purpose entities
• using untraditional ventures to expand business rapidly
• limitations in GAAP
The complex business model used in Enron lead overstate its revenue while not disclose the exact value of debt. Numbers of special purpose entities are used to keep debt off the books. The untraditional ventures incense the business expansion rapidly and risky. Also, the limitation of GAAP makes it possible that management took advantages of complex standards to hide the actual economic substance. All of these above increase the likelihood of material misstatements in Enron’s financial statements.
[2] (a) What are the responsibilities of a company's board of directors? (b) Could the board of directors at Enron—especially the audit committee—have prevented the fall of Enron? (c) Should they have known about the risks and apparent lack of independence with Enron's SPEs? What should they have done about it?
The responsibilities of a company’s board of directors include:
• Protect the shareholders’ assets and provide a return on investment
• Make important decisions that affect shareholders (dividends)
• Decide on which executives to hire / fire
The fall of Enron could have been prevented by the board of directors. The board should responsible for the company's financial reports. However, they are failed to disclose the off books liabilities to the public, which led the Enron fall. What is more, the board and