Question

Enron Corporation was an American energy, commodities, and Services Company based in Houston, Texas. It was founded in 1985, Kenneth Lay was the founder of the company, first founded in Omaha Nebraska and then it moved to Houston Texas .Before its bankruptcy on December 2, 2001, Enron employed approximately 20,000 staff and was one of the world's major electricity, natural gas, communications and pulp and paper companies, with claimed revenues of nearly $101 billion during 2000.

Enron’s line of business:

Enron was originally involved in transmitting and distributing electricity and natural gas throughout the United States. The company developed, built and operated power plants and pipeline. Enron owned large network of natural gas pipeline, which stretched ocean to ocean and border to border. Enron traded in more than 30 different products, including the following: Petrochemicals, Plastics, Power, Pulp and paper, Steel, Weather Risk Management, Oil and LNG transportation, Broadband, Principal Investments, Risk management for commodities, Shipping / freight, Water and wastewater. It was also an extensive futures trader, including sugar, coffee, grains, hogs, and other meat futures.

Review of Enron’s Rise and fall:

Throughout the late 1990s, Enron was considered one of the most innovative companies in the world. The company continued to build power plants and operate gas lines, but it became better known for its unique trading businesses. Besides buying and selling gas and electricity. it created whole new markets for such oddball "commodities" as broadcast time for advertisers, weather futures, and Internet bandwidth. Before it bankrupted in late 2001, its annual revenues rose from about $9 billion in 1995 to over $100 billion in 2000.

At the end of 2001 it was revealed that its reported financial condition was sustained substantially by institutionalized, systematic, and creatively planned accounting fraud. The Enron scandal was the biggest bankruptcy in United States history which cost 4,000 employees their jobs. On December 2, 2001 Enron filed for bankruptcy. It was an event that will always be remembered as one of the most disastrous events in the financial world.

The reasons for collapse of Enron company:

There are some reasons that lead to the collapse of Enron:

•Cheating and manipulation by the board of directors to achieve their personal interests at the expense of the interest of the company.

•That the board of director has delegated the task of reviewing the company’s transactions to a sub-committee within the company. The committee has only conducted a quick review of these transactions. The board of directors has concealed very important information whose knowledge may have led to some appropriate action.

•The company’s management inflated the company’s profit to about $ 1 billion by raising the profit by 586 million and hiding debit of $ 2.6 billion in the year before the company’s collapse.

•The loss of the members of the audit committee is independent and neutral because of the enormous they charge from the administration and may reach up to $380000 per year per member.

With the fall of Enron, the financial auditor ARTHER ANDERSON fell for his role in this process, culminating in the company’s disposal of most of the city document. But Enron’s scandal has prompted the US government to amend a number of market laws, most notably issuing legislation allowing employee to sell their shares three years after they own them, and more importantly, the Sarbanes-Oxley act, which explicitly tightens penalties for such crimes. The CEO and CFO are fully responsible for any manipulation of the financial statement. In September 2008, Enron shareholders won the lawsuit against the company and received $7.2 billion damages, the biggest settlement in the history of fraud involving listed company.

Questions:

a.Explain how the dramatic collapse of Enron has severely shaken the U.S. Capital markets in

2001.                                                                                                                                                

b.Suggest the measures that could be taken to restore the credibility of the accounting profession and investor confidence in the financial reporting process.                

Question 2

Describe the Financial Reporting practices followed in Oman quoting some practical instances. Also highlight the principles that govern the financial practices in Oman and the Organizations that form regulatory frame work in Oman.                                              

Answer 1

The Houston based commodities, energy and service corporation Enron was involved in one of the biggest fraud cases in the United States of America. Underlying the fraud was the deception of reports and statements that gave a very inaccurate and misleading view about the company.

The Organisation, Time and Place

Enron Initiated as an interstate pipeline company through the merger of Houston Natural Gas and Omaha-based InterNorth in 1985.(The rise and fall of Enron: a brief history, 2006)
With this merge the previous CEO of Houston Natural Gas, Kenneth Lay, advanced and became the new CEO of Enron. He was very quick to rebrand Enron into an energy trader and supplier. In the year of 1999, Enron began to widen their scope…show more content…
It revealed that the firm’s success was due to an elaborate scam ranging from shady dealings to concealed debts. (Enron scandal at-a-glance, 2002). The year of 2001 was pivotal in revealing the depth of this deception. In August that year the company’s CEO Jeffery Skilling announced his departure, having been CEO for six months. The unexpected resignation was followed by many stakeholders selling large amounts of Enron stocks as the price continuously dropped. It reached a point where it was selling less than a dollar from a peak price of $90 per share. (Folger, 2011) Following the month of October saw Enron report a loss of $618 million, its first quarterly loss in four years. (The rise and fall of Enron: a brief history, 2006. The SEC opens a formal investigation into Enron’s dealings so they can get an insight into the activities that took place that resulted in the company making the abnormal loss. All attempt to sell the shares of the company ceased as there was too much debt in t