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Insolvency Law Assignment

   

Added on  2019-12-03

27 Pages9482 Words123 Views
Accountingresearch project

DECLARATION OF AUTHENTICITYI hereby declared that, the present investigation is conducted while considering all theethical norms. The issue of plagiarism is avoided throughout the study and nothing is copied. Ihave personal collected the secondary information from books, journals and online sources andnothing is copied and pasted. The information is further collected from the authentic and reliablesources. The secondary is properly cited in accordance with right authors.

ABSTRACT Accounting scandal of Enron is major case of fraud and manipulation in US. This scandalwas resulted due to unethical practices of directors and auditors of the company. It is seen in thecase that initially the company was able to generate good value for the business but later thesepractices leaded to the situation of insolvency. Insolvency of the company had affected various stakeholders such as shareholders,employees, public, investors and government. Investigation in present study shows that thecompany had manipulated their financial values in order to hide their increasing debt. Due to thisaspect, shareholders of the company had faced huge capital loss and employees of the companyhad lost their money saved in retirement account of company. Enron had made use of creative accounting practices for the misstatement of financialvalues in the accounting records. As a consequence, there was a huge hidden cumulative profitthat had later made drastic reduction in the value of business. The fraudulent accountingpractices were adopted by the company through creation of Special purpose entity andapplication of revenue recognition concept and mark to market accounting. Further, auditingissues shows the manner in which auditor of the company failed to report accounting fraudsconducted by managerial parties.

TABLE OF CONTENTS1: Introduction......................................................................................................................................11.1: Enron's Beginning or Background........................................................................................11.2: Overview of research............................................................................................................11.3: Aims......................................................................................................................................11.4: Objectives.............................................................................................................................21.5: Chapter summary..................................................................................................................22: Literature review..............................................................................................................................33: Research methodology.....................................................................................................................93:1: Introduction..........................................................................................................................93:2: Approaches, design and justification....................................................................................93.3: Selection of the research.....................................................................................................103.4: Data collection and analysis...............................................................................................103:5 Limitations of research........................................................................................................104: Results/Findings/Discussion and Analysis.....................................................................................124.1 Special purpose entities (SPE).............................................................................................124.2 Mark to Market accounting..................................................................................................124.3 conflict of interest................................................................................................................134.4 External audit.......................................................................................................................134.5 Truthfulness.........................................................................................................................144.6 Internal and external governance.........................................................................................144.7 Credit rating agency.............................................................................................................154.8 Corporate governance..........................................................................................................155: Government respond after eron Collapse.......................................................................................165.1 Sarbanes-Oxely act..............................................................................................................165.2 Fasb reaction and reconsideration of standards...................................................................165.3 Was Sarbanes-oxley act enough..........................................................................................176: conclusion.......................................................................................................................................187: Recommendations..........................................................................................................................198: References......................................................................................................................................20

1: INTRODUCTION1.1: Enron's Beginning or BackgroundEnron is an American energy company which is formed in the year 1985 through mergerof Intermonth and Houston Natural Gas by Kenneth Lay (Chairman and CEO). This merger wascompleted after deregulation of the natural gas pipelines. In the process of merger, huge debt wastaken by the company due to which they were not allotted exclusive rights to its pipelines. Aftersome years of merger, Jeffery Skilling (former President, COO, and CEO) was hired by thecompany. Within 15 years, the organization had attained the seventh position in the energyindustry. The company was operating with the staff of 20000 and it was considered as the majorsupplier of communication, natural gas, electricity and pulp and paper (Grey, 2003). In the endof year 2000, the company had claimed revenue of $111 billion. Enron had built good reputationin the market through their effective operating strategies. As a consequence, it was considered asthe most innovative company in America for six consecutive years. Enron was trading in morethan 30 different products and prior to the bankruptcy their corporate structure was bifurcatedinto seven distinct business units. 1.2: Overview of researchThis research has been conducted with a motive to evaluate major reasons that had leadedto the collapse of Enron. For this, data has been collected from secondary sources. Further, it hasbeen analyzed by using qualitative techniques. From this study, it has been inferred thatmanagement of company had taken benefit of accounting and auditing loopholes in order tomanipulate financial statements.1| P a g e

1.3: AimsThe major aim of study into consideration is to identify reasons which had leaded to theinsolvency of the Enron. The research aims at showing loopholes in accounting and auditingpractices that had assisted company in hiding financial losses and debt portion in their financialstatements. The performance of the cited organization is judged in terms of finance i.e. revenuesand profitability. Further, analysis is conducted on government policies for corporate governanceand auditing practices in order to prevent such accounting scandals in the future. 1.4: ObjectivesObjective of the present study is to evaluate key literatures regarding accounting scandalof Enron. In addition to this, the study focuses on assessment that whether regulatory normsdeveloped by governing authorities are able to manage such scandals. For this aspect, variousprovisions of Sarbanes-Oxley Act and IFRS are e considered. On the basis of this investigation;recommendations are provided in context to auditing and accounting loopholes. 1.5: Chapter summaryChapter 1 introduction provides description regarding background of Enron and routemap of present study. In second part of the study key literature is assessed by considering viewpoints of various authors. In third chapter, research methodology is discussed that is used toattain aims and objectives of the study. On the basis of key literature, analysis is done in fourthchapter in order to draw valid conclusion and to provide recommendation for the prevention ofaccounting scandals in the future.2| P a g e

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