COLUMBAN COLLEGE, INC.

College of Business and Accountancy

Bachelor of Science in Accountancy
Olongapo City

The Crooked E- The Unshredded Truth About Enron (2003)

CASE ANALYSIS

Group 1

Zemin Moreno

Racquel Dolor

Trisha Janelle Corpus

Christian Eclarino

GAP ANALYSIS

ACTUAL STATE DESIRED STATE

GAPGGGGGGGGGGG GAP
Failure of Enron’s Accurate accounting
accounting system, internal system and effective
control and ethical internal control and
standards. proper ethical standards.

GAP Analysis- Statement of the Problem

Jeffrey Skilling, the Chief Executive Officer, developed a staff of executives that, by the use of
accounting loopholes, special purpose entities, and poor financial reporting, were able to hide
billions of dollars in debt from failed deals and projects. Andrew Fastow, the Chief Financial Officer,
misled Enron’s board of directors, audit committee on high-risk accounting practices, and
pressured their audit and accounting firm to ignore the issues. Enron rewarded their efforts and
paid the top executives $680 million in 2001 before the collapse. Enron shares has high worth at
their peak but dropped down immediately after the scandal was revealed and the company
collapsed. Enron executive Michael Kopper would go on to plead guilty to conspiracy to commit
wire fraud and money laundering conspiracy in August 2002. Enron Executive Andrew Fastow was
charged with securities fraud, wire fraud, mail fraud, money laundering and conspiracy in October
2002. The Chief Executive Officer, Jeffrey Skilling, was indicted on fraud and conspiracy charges in
February 2004. Paula Rieker, the Enron vice president responsible for investor relations, pleaded
guilty to insider trading in May 2004 (CNN Library, 2016).
 COLUMBAN COLLEGE, INC.
College of Business and Accountancy
Bachelor of Science in Accountancy
Olongapo City

ISHIKAWA DIAGRAM

CAUSE AND EFFECT

Enron continued Hide huge Used complicated

to grow by amount of accounting
acquisition, debts and method and have
leading to large heavy losses. improper
amount of debts. financial reports.

Enron’s
Failure

Fraudulent Improper
activities of information,
executive incentives and Mismanagement
officers. governance and wrong
between managers decision-making.
and investors.

Analysis of CAUSE and EFFECT

The cause of Enron’s bankruptcy is lack of truthfulness by management about the health of the
company. The senior executives believed Enron had to be the best at everything and that they had
to protect their reputations and their compensation as the most successful executives in the U.S.
The conflicts of interest and a lack of independent oversight of management by Enron's board
contributed to the firm's collapse. Moreover, some have suggested that Enron's compensation
policies engendered a myopic focus on earnings growth and stock price and recent regulatory
changes have focused on enhancing the accounting for SPEs and strengthening internal accounting
and control systems. The principal method used by Enron to “cook its books” was an accounting
method known as mark-to-market accounting. Under MTM accounting, assets can be recorded on a
company’s balance sheet at their fair market value. With MTM, companies can also list their profits
as projections, rather than actual numbers. Fair values are hard to determine, and even Enron
CEO Jeff Skilling found it difficult to explain to financial reporters where all the numbers on the
company’s financial statements came from. Skilling stated in an interview that the numbers
 COLUMBAN COLLEGE, INC.
College of Business and Accountancy
Bachelor of Science in Accountancy
Olongapo City

provided to analysts were “black box” numbers that were difficult to pin down due to the wholesale
nature of Enron, but assured the press that they could be trusted. In the case of Enron, the actual
cash flows that resulted from their assets was substantially less than the cash flows that they
initially reported to the SEC under the MTM method. In an attempt to hide the losses, Enron set up a
number of special shell corporations known as SPEs. The losses would be reported under more
traditional cost accounting methods in the SPEs but were almost impossible to link back to Enron.
The majority of the SPEs were private corporations that only existed on paper and financial
analysts and reporters simply did not know that they existed. Another reason is the company’s
internal control weaknesses. Two major failings where that the Chief Financial Officer was
exempted from a struggles of involvement policy, and internal controls over SPEs where a fake
signifier but none in substance. Many fiscal functionaries lack the background of their occupations,
and assets, notably foreign assets, where non-physically secured. There is also an improper
restriction where executives sold their stocks prior to company’s downfall whereas lower-level
employees were prevented from selling their stocks. This left thousands of workers with worthless
stock in their pension. The lower-level employees lost their life savings due to the collapse. The
actions of the executives at Enron leading up to the collapse of the company shows us that they had
a lack of integrity, insatiable ambition, arrogance, and reckless disregard for their actions. The
executives displayed all of the dysfunctional personal characteristics that are found in destructive
leaders. If there were a better restriction, internal control and management, Enron would not have
been collapsed.

Alternative Courses of Action

Alternative Courses of Action Effective Easy to Time Minimal Total

Implement Efficient Risk
1. Proper Leadership

2. Ethical Assessment

3. Improvement of
Independence
4. Strengthen Internal
Control

5. Implement
Transparency and
Accountability
 COLUMBAN COLLEGE, INC.
College of Business and Accountancy
Bachelor of Science in Accountancy
Olongapo City

ALTERNATIVE SOLUTION *(Identifying people involved in the solution)

Proper Leadership – This is the capacity of a company's management to set and achieve
challenging goals, take fast and decisive action when needed, outperform the competition, and
inspire others to perform at the highest level they can. It can be difficult to place a value on
leadership or other qualitative aspects of a company, versus quantitative metrics that are
commonly tracked and much easier to compare between companies. Leadership can also speak to a
more holistic approach, as in the tone a company's management sets or the culture of the company
that management establishes.

Ethical Assessment – It is a process of identifying the future consequences of a current or

proposed action and an assessment of the social significance of those impacts. The impact or effect
is the difference between what would happen with the action and what would happen without it.
Ethical assessment is a tool helping to make the best possible decision about the action using the
best available information in a systematic and proper manner.

Improvement of Independence - The audit committee, along with most of the board, must be
independent. The auditors must also be independent, with no unrevealed ties to the company.
While the BOD have abandoned consulting, they continue to provide other services. Accordingly,
each audit committee should either restrict its auditors to an audit role or publicly disclose the
reasons for any other relationship. Auditors should be rotated every few years to prevent long-
term, close ties between the management and their firm. The audit committee should also prohibit
the management from hiring audit firm personnel for three years after the person has left the firm.
Meetings of the audit committee should start and end with an executive session without the
management, and the committee, as part of these sessions, should meet alone with its auditors.

Strengthen Internal control – The management structures an organization to provide assurance

that an entity operates effectively and efficiently, has a reliable financial reporting system and
complies with applicable laws and regulations. A successful system of internal control is not built
overnight, but is an ongoing process of fine tuning the inner workings of an organization. Many
organizations summarize internal control systems in operational handbooks and manuals so
employees are able to easily refer to the entity’s policies. It is necessary to help employees and
other partners understand the attitude and objectives of the organization as a whole. Internal
controls provide reasonable assurance to customers and other parties that transactions are
recorded properly and in a timely manner.

Implement Transparency and accountability - Two of the most important, yet challenging,
aspects of building a business into a growing, professionally managed organization are
implementing a culture of transparency and accountability. A lot of people would suggest that this
 COLUMBAN COLLEGE, INC.
College of Business and Accountancy
Bachelor of Science in Accountancy
Olongapo City

happens by default in small businesses because there is nowhere for an underperformer to hide.
While this may be, transparency and accountability are more than just about finding out who is
accomplishing goals or not. They are about ensuring that goals and action items are assigned to the
right people, and employees are empowered with information to make decisions. The committee
should be supplied with information regarding alternative methods that would result in different
accounting outcomes and with figures outlining those differences. The reasons for the committee's
acceptance of the management's and the auditor's recommendations should be disclosed in the
financial statements. The audit committee must also ensure that all analyst and press reports about
the company's accounting and disclosures are reviewed. Both the management and the auditor
should be required to address negative comments and the committee should decide whether
changes are necessary. Audit committees are the board's vehicle to monitor financial reporting.
However, neither the audit committee nor the board is a guarantor and neither has an obligation to
ensure perfect accounting or disclosure. They must use reasonable efforts to ensure management
and auditors fulfill their obligations.