Case 6: Accounting 495 – Enron Case
Instructions: There are two parts to this case. Part 1 focuses on what information was in the public domain as of the last audited financial statement for the year ended December 31, 2000. Part 2 focuses the information that was in the public domain as of November 19, 2001 when Enron filed the 10Q for the 3rd quarter of 2001, and the events that led to Enron’s bankruptcy as of December 1, 2001. The most important think about this case is that you must support your conclusions with evidence from Enron’s public filings ONLY
BY ALL MEANS READ AROUND THE TOPIC BUT USE ONLY THE PUBLIC FILINGS TO ANSWER THE QUESTION.
Part 1: In late February of 2001, you were been chosen to write an article for Investors Monthly to be published in the magazine in April 2001. The deadline for publication is March 10, 2001. Investor’s Monthly regularly analyzes the financial statements of public companies. Enron has just published its financial statements for the year ended December 31, 2000. At the time you are given the assignment Enron’s share price is over $80 per share. Investor’s Monthly wants you to tell investors what they need to know from the financial statements. Your assessment needs to be a combination of both a fundamental financial analysis, covering profitability, cash flow liquidity and solvency risk and a view of the business model and its risks and other insights gleaned from the documents file with the SEC.
Your article must not be longer than about 5 pages or about 1500 words or it cannot be published in the available space. Any conclusions need to be supported by reference to the data presented in the financial statements. In addition to the word limit, you may include tables that support your arguments. Please remember that including a table without explaining its purpose is a waste of space and a grade damager. Use headings and bolding and other devices to make your key points stand out. There are grade points for clarity of argument and display
Hint: This about the issues and questions that we have addressed in our study of the Financial Statement Analysis target companies. Be systematic about your analysis of the data included in the financial statements. Don’t bias your analysis with what you “think” you know about Enron. Focus on the facts as reported in Enron’s financial statements.
Do not cite Bethany Mclean under any circumstances – feel free to read her article (she is not an accountant) and by all means watch/read “The Smartest Guys in the Room”
Part 2: On December 2, 2001 Enron Corporation filed for bankruptcy. The bankruptcy of Enron represented the largest bankruptcy in U.S. History. Many people were surprised when Enron filed for bankruptcy. On December 5, 2001 Investor’s Monthly approaches you again to ask you to describe the economic events that led to Enron’s Bankruptcy. Investor’s Monthly wants you to make reference to your comments in the first article while focusing primarily on what additional information was disclosed in Enron’s 1st, 2nd and 3rd quarter 10Q’s , together with the article that you wrote in March
During the article address at least the following questions
1. What were the facts behind Enron’s bankruptcy?
2. What were the economic events that led to Enron’s failure?
3. Should the Investors have been able to see this coming especially if they had read your
4. Though acknowledging some temporary business difficulties, Jeff Skilling claimed that
the company was in sound financial health when he resigned on August 1, 2001. In their trial, he and Ken Lay argue that the bankruptcy was the result of a credit crisis that was beyond their control and that they were rendering “honest services” to the shareholder.
5. What actions could the management of the company have taken to hold off bankruptcy? It is OK to argue that there were none but your answer needs to be logically consistent with the rest of your answer
Once again, Investor’s Monthly has given you a 1500 word limit, so you must focus on the key issues. In addition to the word limit, you may include tables that support your arguments.
Hint: Consider Enron’s earnings and cash flows in the first 3 quarters. How did liquidity and solvency risk change as the company progressed through the year?
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