FOREIGN TRADE UNIVERSITY FACULTY OF BUSINESS ADMINISTRATION - - REPORT FINANCIAL ACCOUNTING Write-up case: “Management fraud and accounting tips are used to manipulate Enron's income statement and balance sheet.” Represented by: Nguyen Dinh Hai Class: KETE301.1 Student ID: 1716250006 Lecturer: MsC TRAN THI PHUONG THAO June 9, 2019 LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com THE TABLE OF CONTENT INTRODUCTION TO ENRON AND ITS FRAUD I General introduction to Enron Enron's cheating situation .3 II ANALYSIS OF ENROL’S FRAUD CASE COMPLETE PROCEDURES IN ENRON FINANCIAL STATEMENTS .4 a Fraudulent acts of the Board of Directors b Fraud in accounting of Enron company III CONSEQUENCES AND SOLUTION a Consequences b Solutions REFERENCES LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com I INTRODUCTION TO ENRON AND ITS FRAUD General introduction to Enron Enron Group was established in 1985 on the basis of merging two companies, Houston Natural Gas and Internorth of Omaha.In 1985, Kenneth Lay merged Houston Natural Gas and InterNorth to found Enron Energy Company In the early 1990s, Lay contributed to selling electricity at market prices, so traders like Enron could sell energy at a higher price and significantly increase the profit.Thanks to the new regulations on liberalizing the US energy market in the 1990s, they built from a blurring company into a corporation that could change the balance in the energy business By 1992, Enron had grown to become the largest natural gas dealer in North America In November 1999, the company launched EnronOnline trading website to better manage contracts trading business In an effort to achieve further growth, Enron has pursued a strategy of diversification.Enron owns and operates a wide range of assets including gas pipelines, power plants, pulp and paper plants, water plants, along with a wide range of services worldwide Enron also earns additional revenue by buying and selling contracts within the same array of products and services that the company participates in Enron stock prices soared, from the early 1990s to the end of 1998 jumped 311%, outperforming the growth rate of the S&P 500 index In the years of the millennium hinge, Enron stock prices increased by 56% and 87%, while the S&P index increased by 20% in 1999 and decreased by 10% in 2000 Enron continued to be a bright star on the stock market On December 31, 2000, Enron shares were priced at US $ 83.13 / share and the company's market capitalization exceeded US $ 60 billion, 70 times higher than its income and times the book value, indicating the stock market much expectation on Enron's future prospects In addition, Enron has been evaluated for consecutive years by the Fortune Magazine survey as "America's most innovative company" In August 2001, CEO Jeffrey Skilling resigned for personal reasons Enron announced a loss of 618 million USD in the third quarter but actually reached 1.2 billion USD Enron's cheating situation Enron has committed fraudulent activity to make fraudulent financial statements Enron is a listed company on the stock market, the company prepares fraudulent financial statements to adjust to "beauty" Financial statements: beautify business results, beautify the balance sheet, theory Intelligent financial statements omit important information It was the misinformation about management ability, Enron was advertised very effectively through the audit firm Arthur Andersen and Wall Street analysts, so the number of people buying the company's shares is record high LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com When the company was in trouble, they persuaded workers to receive salaries and bonuses in stock When the US Securities and Exchange Commission investigated, Fastow's CFO had to leave, Enron's stock plummeted, the trust of lost customers no longer invested This is the basis of suspicion that caused the incident exposed The debt of USD 1.2 billion is hidden The Arthur Branch of Arthur Andersen issued false audit reports to benefit Enron, so getting million USD / week also involved finding partners for Enron The huge amount of money overshadowed the audit staff and they were easy to ignore the principle CEO Arthur Andersen, Mr Joe Berardino admitted they had violated a serious mistake to everything to limit it lowest of Enron's ability to break, but they destroyed most documents related to the incident To hide the fact that the company had borrowed through its affordability, Enron's leader took advantage of the legal loophole to set up subsidiaries without financial statements In this way, Enron did not have to publicize the debts, and concealed losses Enron's results inflated its profits and the company's stock price also increased accordingly When Enron officially announced in 1997 that the company had lost over $ 500 million, insiders promptly collected huge profits from company stocks Specifically, the Chairman and General Director held 138 million shares of the company In early 2001, Ken sold for $ 79 a share and these deals were not published In late 2001, the stock price was only $ 0.6 Enron's financial activities were all based on the design and operation of the name "Ghostly Alliance" A network of interconnected ties between Enron, a number of government officials and especially auditor Arthur Andersen Interesting point Arthur Andersen signed a contract to advise Enron After that, I played an audit role to confirm Enron's financial statements II ANALYSIS OF ENROL’S FRAUD CASE COMPLETE PROCEDURES IN ENRON STATEMENTS a Fraudulent acts of the Board of Directors FINANCIAL The Board of Directors is responsible for: Directly responsible for preventing and detecting fraud while Enron's Board of Directors are the ones who seek and implement accounting frauds to achieve the item my destination With a rapid growth strategy, Enron's Board of Directors actively buys other companies and assets A large part of the loan from the bank, a part of the capital issued by the company to buy Enron partner company shares with the level of Enron's leadership did not stand in the field of energy production and trading but jumped into the financial services sector in the energy sector This is a risky business and requires a lot of capital The monopoly in the management and control of the company, the management of the company decides to produce at a higher level than the optimal capacity This allows the company to reduce the price of the product unit by taking advantage fixed costs, thereby increasing the current year's profit LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com The downside of this work is that machinery and equipment must work with higher capacity than the optimal, negatively affecting the productivity and durability of the device At the same time, products that make a lot of unsold items will incur storage costs Long-term inventory leads to a decrease in value, these costs will directly affect the company's profitability in the following years Or cut down on research and development costs, advertising costs, equipment maintenance costs As a provider, Enron signed price fixing contracts with future customers and collected fees from these contracts These costs are included in the current revenue, while the risks are in Enron's future will incur subsidiaries founded by Enron to name the property, and suffer and isolate financial risks For example: When Enron develops more pipes, the company can set up a subsidiary (SPE) This SPE unit will own the pipeline and immediately mortgage this pipeline and take the revenue from the pipeline to pay the creditor In this way, the balance sheet of the company does not represent the whole property corresponding debt SPE-related accounting law: According to accounting regulations, in the total capital of the subsidiary, there must be at least 3% of Enron's shares But if Enron's shares are less than 50% of SPE's stock, Enron's books not represent TS and the debt liability of SPE At the time of the collapse, Enron has 900 SPE, most of them are located in tax preferential countries Enron uses SPE to manipulate financial statements, hiding investors from information that should have been disclosed Although there is very little equity, SPE can still borrow from banks for two reasons: * First: Creditors believe that Enron has signed a contract to use SPE's assets so SPE's activities are guaranteed * Second: they believe Enron bailed out for SPE loans Enron's debt: Enron has created a legal trick in which Enron, SPE and JP-Morgan have used the way of swapping contracts to make long-term debt shown on the balance sheet as "stock responsibilities." " Exaggerate sales and profits: Enron sells assets to SPEs with inflated prices to create fake profits The company also buys and sells with SPE to increase sales and reduce the level of fluctuation of profits Covering losses: Even in the third quarter of 2001, the company only reported losses, but the losses actually arise from previous years Especially in the fuel crisis in 2000, when the world fuel prices were high, Enron still had to sell at fixed prices according to the signed contracts The company used contract tricks to convert these losses into SPEs However, when the SPE lost, the value of Enron's shares in SPE fell below the minimum 3% required Consolidating SPE's financial situation and parent company's financial statements caused two effects: the parent company's debt increased and the parent company's profit dropped Fraud of senior managers takes place throughout the company Many executives benefit A lot of Enron Energy Management's managers are involved in accounting fraud, illegal internal transactions Among them, Enron's CEO Andrew Fastow has illegally benefited over 33 million The USD from the loopholes of transactions helps the directors to earn profit here is the fee for buying shares of the members at a very high level and the LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com monopoly in the management of the company In early 2001, Ken sold out for $ 79 a share Most of these purchases were not published In late 2001, the stock price was only $ 0.6 Non-transparent accounting procedures mask the loss of the group by establishing outside cover companies The financial statements are not transparent, high stock prices mean high expectations of the company about the profitability of the company, thereby putting pressure on leaders to create corresponding profits On the other hand, leaders also hold a large number of stocks, so they themselves not want stock prices to decline b Fraud in accounting of Enron company Revenue Fraud: Prices in the energy industry fluctuate very strongly, while customers need to stabilize prices As a provider, Enron signed price fixing contracts with future customers and charged them These charges are included in the current revenue, while the future risk of Enron will be incurred Investment: With a rapid growth strategy, Enron actively bought more companies and other assets A large part of the loan from the bank Part of the capital issued by the company is the option to buy shares of the company The release of options increases the motivation for evaluating the company with a more positive outlook Use of prepaid contracts:Enron borrows banks but does not properly recognize the liabilities, but recognizes it as "future energy business transaction" In particular, the loan amount is recorded as sales revenue, interest is recorded as a risk of price risk Enron borrowed about 8.6 billion, but did not declare it as a debt on the financial statements Misuse of fair value method: Enron takes advantage of the permission to apply a fair value method to evaluate higher than the real value of assets without market prices or difficult to identify; or to estimate interest on investment projects and record interest immediately even though the project is not yet active; or record revenue and profit right after signing long-term future contracts Create special-purpose units (SPE): Enron's Board of Directors established many businesses Each business only performs a certain purpose These businesses are "tools" to perform complex transactions to cover up the real financial situation and create virtual profits for Enron, and are the basis for performing misappropriation of assets It is important that the financial statements of SPEs are not incorporated into Enron's financial statements The companies, called SPE (Special Purpose Entity), were founded by Enron to name their assets and suffer and isolate financial risks For example, when Enron developed more pipes, the company could create a SPE This SPE unit will own the pipeline and mortgage this pipe to borrow money to build Enron can still use this pipeline and take revenue from the pipeline to pay the creditor In this way, the company's balance sheet does not represent both assets (pipeline) and debt liability respectively SPE-related accounting law: According to the accounting rules, the total capital of the subsidiary must be at least 3% of Enron's shares But if Enron's shares were below 50% of SPE's stock, Enron's books did not represent SPE's assets and liabilities LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com Abuse of SPE: Although the number of SPEs has increased over the years, experts say a company with four or five such partners is too much At the time of the collapse, Enron had 900 SPE, most of which were located in tax-free or easy-to-access countries Enron uses these SPE to manipulate financial statements, hiding investors from information that should have been disclosed, and exploiting differences in financial accounting laws as well as tax accounting laws Debts of subsidiaries: Although for only very little equity, the SPE can borrow from banks for two reasons First, creditors believe that Enron has signed a contract to use SPE's assets, so SPE's operations are guaranteed Secondly, they believe Enron bailed out for SPE's loans Debt of Enron: Enron himself borrowed to expand, but a company could not borrow too much due to limited creditors' terms Enron has invented a legal trick in which Enron, SPE, and JP-Morgan have used conversion contracts to make long-term debt shown on the balance sheet as "stock liability" LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com CONSEQUENCES AND SOLUTION a Consequences With the above tips, the company profits were inflated and thereby helped the company's stock price rise Part of the capital issued by the company is the option to buy shares of the company The release of options increases the motivation for evaluating the company with a more positive outlook This deceives investors and employees of the corporation (when paying by shares) At that time, stock trading and stock options brought huge profits to the key managers of Enron (the Liar) For the market and society: The collapse of Enron has caused strong influence on society in general and audit profession in particular This incident has lost the confidence of investors in the stock market as well as the quality of auditing AA provided Enron audit and consulting services for 16 years and their revenue in 2000 was 52 million from Enron Independence occurs when revenue from Enron accounts for a large proportion of AA's total revenue Enron had to file for bankruptcy in late 2011, becoming the largest US bankruptcy until that time with a whopping 63.4 billion dollars Their 85,000 employees become unemployed b Solutions Enron's accounting frauds were compared to some of the weaknesses in accounting standards at the time Firstly, due to unclear provisions on conditions for SPE companies, it is necessary to consolidate financial statements with the parent company Secondly, it is allowed to evaluate investments according to fair value instead of original prices without specific and uniform regulations, thus creating an opportunity for Enron to inflate its assets and profits as well as to hide losses company losses Violations of key managers at Enron mainly stem from weaknesses in the control system of the company The Board of Directors and the Supervisory Board cannot fulfill their supervisory functions with the board of directors The senior executives of the corporation violated business ethics when they sought to inflate profits with high salaries The collapse of Enron helped narrow the gaps of accounting standards as well as the legal provisions on readability of auditors, and professional organizations also renewed the rules on religion German career In addition, the Saxbanes - Oxley Act of 2002 asked the US Securities and Exchange Commission (SEC) to establish an independent monitoring organization (PCAOB) and further strengthen its role in security protect investors III REFERENCES http://thoibaotaichinhvietnam.vn/pages/quoc-te/2015-10-16/10-vu-beboi-dinh-dam-nhat-cua-cac-doanh-nghiep-tren-the-gioi-25321.aspx https://vietstock.vn/2012/08/nhung-vu-an-kinh-te-chan-dong-ky-2enron-ke-doi-tra-vi-dai-772-234994.htm https://www.investopedia.com/updates/enron-scandal-summary/ https://www.investopedia.com/terms/e/enron.asp LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com http://doan.edu.vn/do-an/de-tai-nguyen-nhan-enron-va-worldcom-supdo-27359/ LUAN VAN CHAT LUONG download : add luanvanchat@agmail.com ... committed fraudulent activity to make fraudulent financial statements Enron is a listed company on the stock market, the company prepares fraudulent financial statements to adjust to "beauty"... workers to receive salaries and bonuses in stock When the US Securities and Exchange Commission investigated, Fastow's CFO had to leave, Enron's stock plummeted, the trust of lost customers no... Directors FINANCIAL The Board of Directors is responsible for: Directly responsible for preventing and detecting fraud while Enron's Board of Directors are the ones who seek and implement accounting