The Collapse Of Enron And Worldcom Finance Essay

October 4, 2017 February 4th, 2019 Accounting

The intent of this assignment is probe how recognition crunch issues is widespread in the universe and what is the quality of fiscal statement. This will be shown by analysing the fraud in fiscal statement of Enron and WorldCom.

Background:

The prostration of Enron and WorldCom

Company

Assetss ( Billions )

When filed

WorldCom

$ 103.9

July 2002

We Will Write a Custom Essay Specifically
For You For Only $13.90/page!


order now

Enron

$ 63.4

Dec.2001

The fiscal statement Enron Corporate and The methods of Enron Corporation that used to the fraud of the fiscal statement

Table 1: Annual study 2000 ( Enron corp. 2000 )

Table 2: Compare grosss of the Enron during the period 3 old ages ( Enron corp. 2000 )

Harmonizing to SEC in November 2001, Enron announced the new Financial Statement in, which was re-statement during the 4-year period from 1997 to 2nd quarters of 2001.

Table 3: Consolides the statement of net incomes ( in 1000000s ) ( U.S. Securities and Exchange Commission 2001 )

1997

1998

1999

2000

1st Qtr 2001

2ndQtr 2001

Net income as reported

$ 105 ( a )

$ 703

$ 893

$ 979

$ 425

$ 404

Restatements:

-Consolidation of JEDI and Chewco

( 28 )

( 133 )

( 153 )

( 91 )

6

-Consolidation of LJM1 subordinate

( 95 )

( 8 )

-Raptor period proposed audit accommodations

-Prior period proposed audit accommodations and reclassifications

( 51 )

( 6 )

( 10 )

( 38 )

29

5

Net income as restated

$ 26

$ 546

$ 635

$ 842

$ 460

$ 409

From the graph, we can see that there is a considerable addition in the Net income as study. In fact, net income is smaller than they reported doing Enron hided decreased income that the bulk come from JEDI, Chewco.

Table 4: Enron corp. fiscal restatement ( in 1000000s ) ( U.S. Securities and Exchange Commission 2001 )

1997

1998

1999

2000

1st Qtr 2001

2ndQtr 2001

Diluted portions outstanding, as study

555

695

769

814

872

891

DILUTED SHARES RESTATED

553

686

755

801

862

891

Diluted EPS as reported

0.16

1.01

1.1

1.12

0.49

0.45

DILUTED EPS RESTATED

0.02

0.82

0.87

0.97

0.53

0.46

Entire assets as reported

$ 22,552

$ 29,350

$ 33,381

$ 65,503

$ 67,260

$ 63,392

Restatements:

Consolidation of JEDI and Chewco

451

160

181

( 161 )

6

6

Consolidation of LJM1 subordinate

( 222 )

Raptor period proposed audit accommodations

( 172 )

( 1,000 )

( 1,000 )

Anterior period proposed audit accommodations and reclassifications

( 79 )

( 68 )

( 68 )

( 244 )

( 1,087 )

431

TOTAL ASSETS RESTATED

$ 22,924

$ 29,442

$ 33,272

$ 64,926

$ 65,179

$ 62,829

Equity as reported

$ 5,618

$ 7,048

$ 9,570

$ 11,470

$ 11,727

$ 11,740

Restatements:

Consolidation of JEDI and Chewco

-258

-391

-544

-814

6

6

Consolidation of LJM1 subordinate

-166

60

60

60

Raptor period proposed audit accommodations

-172

-1,000

-1,000

Anterior period proposed audit accommodations and reclassifications

-51

-57

-136

-255

-287

-19

EQUITY RESTATED

$ 5,309

$ 6,600

$ 8,724

$ 10,289

$ 10,506

$ 10,787

Debt as reported

$ 6,254

$ 7,357

$ 8,152

$ 10,229

$ 11,922

$ 12,812

Restatements:

Consolidation of JEDI and Chewco

711

561

685

628

Consolidation of LJM1 subordinate

Raptor period proposed audit accommodations

Anterior period proposed audit accommodations and reclassifications

Debt restated

$ 6,965

$ 7,918

$ 8,837

$ 10,867

$ 10,506

$ 10,787

From the chart 2 and table four, we can see clearly In Enron were considerable figure of partnerships ( JEDI, Chewco ) , which had led to Enron hided a important debt. The larger sum of Enron debt rose by borrowing JEDI and Chewco. This is one of the methods of Enron chiefly used to cover debt ( U.S. Securities and Exchange Commission 2001 )

In brief, Enron did non announced equal information in fiscal statement in order to cut down revenue enhancement payments and blow-up income and net incomes and to raise the monetary value of portion ( the high stock monetary value was critical issues to the survived of Enron corporation ( Peter 2002: 91 ) and recognition evaluation. Furthermore, Enron created many partnerships and used partnerships to conceal debts.

2.2.1. The system of operation to merchandise the fiscal statement of Enron

Looking foremost at how Enron can rip off in their fiscal statement. This will be explanation by analysing their procedure of doing fiscal statement ( Peter 2002: 41-2 ) in the graph below in order to hold clearly understanding.

Former Enron ( Chief Financial Officer Andrew Fastow )

)

Enron Board of Directors

Audit Committee

Hearers Arthur Anderson

Fiscal statement

The civilization of Enron Corporation was concentrate net income and how to make greater net incomes ( Peter 2002: 47 ) . Therefore, every person in Enron need do wish what Directors want do including comptrollers and the another houses have the same benefit.

2.2.2. The methods of Enron Corporation that used to the fraud of the fiscal statement

One of the methods that Andrew Fastow used on fiscal statement fraud is he put up the usage of Particular Purpose Entities ( SPEs ) so that to finance the purchases and take out of accounting study. In 1997, there are statements in SPE issue which known like Chewco ( Peter 2002: 61 ) .

Some drumhead about SPEs:

Original had a good concern intents

Truly a joint venture between patronizing company and a group of outside investors.

Cash flows from the SPE operations are used to pay investors.

However, Enron had used SPEs to:

Hide bad investings and poor-performing assets ( Rhythms Net connexions ) . Declines in value of plus would non be recognized by Enron ( Mark to Market )

Hide debt ( borrowed money was non put on fiscal statements of Enron )

Quick executing of related-party minutess at coveted monetary values. ( LJM1 and LJM2 )

To describe over $ 1billion of false income.

Many SPE minutess were timed ( or illicitly back-dated ) merely near terminal of quarters in order to income could be booked merely in clip and in sums needed, to run into investor outlooks.

Mark-to-Market accounting means that it is re-assessed in the valuable in each plus and alterations in value are reflected in balance sheet and income statement in the company.

Forced gross revenues in illiquid markets set monetary values

Drive plus values to insolvent degrees ( despite the absurdness that mark-down of liabilities increase net incomes )

Hazard of confronting an insolvent counter-party generates runs: wholsesale and quasi-retail

Table 5: The different in fiscal statement frauds between 2 company WorldCom and Enron

WorldCom

Enron

Overstating Asset Frauds by used Earnings before interest taxes depreciation and amortization

Understating Liability/ Expense Frauds

The frauds was simple

The frauds was really complicated: many compound minutess and accounting issues

The company, which the 2nd largest in USA is WorldCom, during the 2-year period from 2001 to 2002, WorldCom had exaggerating income by 3.8 billion dollar in order to hedge coverage losingss. In fact, there was non the relevancy of entree fees that paid to local telephone houses with grosss. Because the entree fees known as operating costs that will be minus from EBITDA, so EBITDA would cut down. On the contrary, there was non merely an addition in the current EBITDA, but besides addition in the hereafter EBITDA by capitalising the costs ( Stephen 2007:48-9 )

The monetary value of WorldCom portion traded at 64 dollar per portion over the period telecom bubble, but in 2002, the portion monetary value had decreased quickly to merely under 1 dollar per portion. This had led to the prostration of WorldCom ( Stephen 2007:48 )

3. Credit crunch and quality of fiscal statement

3.1. Credit crunch

There is undeniable that recognition crunch reveal in the recent planetary recession. For discovery out that ground, this rather appropriate to looking at why and how recognition crunch occurs.

There are figure of ground why this fiscal crisis happened ( recognition crunch ) . The recognition crunch started in 2007 with the insolvent of Lehman Brothers, which is one of the most of import in the US establishments. When looking at accounting pattern, some writer have argued that when utilizing just value accounting, this led to the recognition crunch has been acquiring worsen. This will be hard to value what is just value have ; therefore, many people who control stock market and politicians have statements for these issues with inordinate political preventative in the worldwide ( Emerald 2009 ) .

On the other manus, in the prostration of Enron and WorldCom, hearers play the of import function in the recognition crunch occur, which received limited information with opaque coverage. For case, hearers have change audit study ; the function of banking and concern ; in add-on the compound fiscal instruments ( Emerald 2009 ) .

3.2. Quality of fiscal statement

There is grounds to propose that increasing in the figure of fiscal statement frauds in many houses in order to increase earning ; nevertheless, these frauds can merely prolong in the short term and so this will consequence on the stock monetary value in this company. For illustration, the fraud in fiscal statement of Enron and WorldCom had led to sudden bead in their monetary value of portion during the bubble stock market explosion in 2001 ( Stephen 2007:632 )

This wills obsever who is the individual that duty for quality of fiscal statement. There is no uncertainty that with good quality of fiscal statement taking to make non happen recognition crunch. Because fiscal statements include income statement, balance sheet, and so on that is unfastened information ( Jorion 2003 ) .Therefore, How to avoid fiscal statement frauds is indispensable.

Solution

x

Hi!
I'm Amanda

Would you like to get a custom essay? How about receiving a customized one?

Check it out