Question

The Enron scandal, revealed in October 2001, eventually led to the bankruptcy of the Enron
Corporation, an American energy company and de facto dissolution of Arthur Andersen, which
was one of the five largest audit and accountancy partnerships in the world. Enron shareholders
filed a $40 billion lawsuit after the company's stock price, which achieved a high of US $90.75
per share in mid-2000, dropped to less than $1 by the end of November 2001.
The company had lost the majority of its customers and had ceased operating. Employees and
shareholders received limited returns in lawsuits, despite losing billions in pensions and stock
prices. The US Securities and exchange commission began an investigation. Many executives at
Enron were indicted for a variety of charges and were later sentenced to prison. Enron's $63.4
billion in assets made it the largest corporate bankruptcy in U.S. history.
a. Explain, what causes the reasons for the collapse of Enron? What will be the significant impact
on financial accounting standards, auditing rules, and institutional structures such as FASB and
the Securities Exchange Commission?
b. What precautions/measures should be taken by the management to save Enron from
bankruptcy?
Your answer should be around 400 words for each question.

Answer 1

a) following Cases, Significan Impact on Financial Accounting standard, Audit rules

• Financial Statement/Accounting Loopholes
• Complex Business Model & Unethical practice
• Poor Financial reporting- were able to hide billions of dollars in debt from failed deals and projects
• Top Management/Executives are also Misled the Enron's Board members & Also Pressure Audit comitte to ignore the Issue.
• Destroy All relevant documents illegaly whil Investigation by SEC (Security Exchage Comittee)
• Credit Rating Reduce drastically.

b)

• As a consequence of the scandal, new regulations and legislation were enacted to expand the accuracy of financial reporting for public companies
• increased penalties for destroying, altering, or fabricating records in federal investigations or for attempting to defraud shareholders.
• Streghthining Account standards & Audit Comitte.
• Increse the frequency of Monitoring & reviews..