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

Developing of hypotheses if enron chief executive

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3. Developing of Hypotheses If Enron chief executive officer would avoid Sophisticated accounting practice, avoid Setting up of independent partnership, encourages internal policies/control , avoid of misleading Investment banks, avoid Poor Auditing, avoid manipulating of rating Agencies, ethically working hand in hand with the government, and avoid confusion of Capital Market Regulatory Authorities, the company should be profitable in a long run.
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4. Determination of measures 1 In Enron’s case, the measures used to keep the company profile highly endorsed with the manipulation of the independent auditor was the use of Mark to Market accounting and Transferring of expensed to independent partnership (Wolak, n.d, Para.1-2). As being seen as a problem, Mark to Market is a major measure in which Enron uses to purposely miscalculate the fair value of their asset which then contributed to risk or overcook their financial statement. Similarly, as Enron was operating on uncertainties, most expenses were being transferred to a separated entity that was being assisted by few financial investment banks in setting up, therefore the balance sheet show no records of the large company’s expense. Recommended measures: 2 If Enron and shareholders would take into account the Gross margin, Profit margin and working capital measures, the firm of Enron would have been healthy in terms of the business operations (Stevens, 2015, Para.1-20). Gross margin: The primary reason for understanding the gross margin is to drive a profitable business. The gross margin is derived by subtracting the sale price of a good from the straight cost of producing the product. Profit margin: Profit margin would have been an ideal measure as it would determine the profit gained. It is determined by dividing the net profit after tax and the sales.
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Working capital: In overall working capital measures would determine how healthy the business was. And it is calculated by finding the difference between the current assets and current liabilities. If Enron would have applied these measures properly without manipulative thoughts, the business would be stable in terms of healthy business operations in a long term goals
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5. Data collection (Internally from the case) Table 1: Enron’s accounts: true picture Reported income Revise Income True debt True equity 1997 $105m 77m Up$771m Down$258m 1998 $733m 600m Up$561m Down$391m 1999 $893m 645m Up$685m Down$710m 2000 $979m 880m Up$628m Down$754m Source: Enron: The fall from Grace/ the world’s biggest fraud Table 2: International shockwaves: Companies with substantial exposure to Enron J P Morgan: $900m Sumitomo Mitsui Corp: $207m Citigroup $800m Nikko Cordial: $207m Credit Lyonnais: $250m Principal Financial Group : $171m Bank of Tokyo-Mitsubishi: $248m Abbey National: $164m Chubb Corp: $220m National Australia Bank: $104m Canadian Imperial bank: $215m Duke Energy Corp: $100m Source: Enron: The fall from Grace/ the world’s biggest fraud
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Figure 1: Enron stock price (rise to fall) Source : Figure 2 : Enron’s Political contribution Source: 1992-1999 1984-1991 Share price ($) 2000-2002
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6.
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