Accounting theory Major Assignment (Enron's case study).pdf

Setting up of independent partnership setting up of

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Setting up of independent partnership Setting up of independent partnership was also one of the major firm’s problems. Unethically, Enron establishes an independent partnership. The independent partnership was created purposely to initially wipe losses in the financial report of Enron, if the assets are being transferred to the partnership. Indeed, concurrently shareholders financial capital entering Enron from fresh partnership were being carried directly to the financial report and recorded straight as profit, although the profits were associated with a particular venture that is inactive and artificial. This becomes a problem, as Enron intentionally create the independent partnership entity called “special purpose entity”, to manipulate the firm’s financial reports , and confuse the investors. Poor internal control/policies As internal controls by companies are being carried out to make sure that the a company policy are put to protect the asset of a firm, Enron was also luck of internal control as responsibilities were made at the higher stages which the integrity of the firm’s financial information dependents upon. Internal control is significant to a firm’s success, which a lot of infant accountant coming in the profession are unaware of their es sential (Thomson, 2015, Para.1). However, in Enron’s case, the chief executive officer was aware of the situation and the importance of internal control, but acted on his self interest as he was at the top of the command. On the other hand, as Enron’s chi ef executive officer has a corrupted mind of profit making, the internal control was discouraged, which the policies and procedures were not being followed, therefore the company’s assets were being expose to misleading the primary concept of following the rules and procedures underlined by accounting standards (Bartol, 2008, P.5-7). Furthermore, the chief
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executive officer was acting on self- interest which is underline in accounting theory as “Private interest theory”. Investment banks There were few investment banks that contributed to the problem of bankruptcy for Enron. The primary role of an investment bank is to act as financial adviser to potential investors (Maverick, 2016, Para.1). However in the case for Enron, these investment banks contributed by forming a contentious partnership which gives false information about Enron worth of unprofitable assets, acting as major lender to Enron, and helping Enron to setup the special purpose entity to divert all the loses and expenses to, which causes lack of transparency (Thomas, 2002, Para.19-20). Furthermore, offshore entity form by an investment bank to prepaid the delivery of the energy (Oil and Gas), significantly were being falsified. On the other hand, as Enron’s workforces were multiplying, the firm managed to capture the attention of the employees through the investment banks, to deceive the employees to invest into to pension scheme to maximize their profit in the future. Therefore, the investment banks assisted Enron in manipulating their financial report in
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