business individual paper

ACTG 495

Graded Case - Enron (Individual)

On December 2, 2001 Enron Corporation filed for bankruptcy and shocked the financial world. Enron was the seventh

largest company (by revenue) in the United States. How could this high profile company have failed? A number of articles

and books have profiled the company’s aggressive personnel policies where every year they “weeded out” a bottom tier of

employees. There have been significant discussions of Enron’s use of special purpose entities and “off balance sheet” debt

(however, there has been little discussion of off balance sheet assets). Other topics include Enron’s use of “mark-to-market”

accounting and other transactions designed to simply allow Enron to hit targets so that managers could earn their bonuses.

Some of these transactions involved collusion with Enron’s lenders. Early in 2002, Congress, the SEC, the Justice

Department, and the press were all investigating this case for evidence of wrongdoing. You will find a number of articles in

business and news magazines from mid December 2001 through March 2002 with substantial details about the Enron

collapse. However, there is a significant aspect of the story that is not told. Few have discussed what could have been

learned from Enron’s financial statements.

There are two parts to this case. Part I focuses on what information was in the public domain as of the last audited financial

statement for the year ended December 31, 2000. Part II focuses on the information that was in the public domain as of

November 19, 2001 when Enron filed its 10-Q for the third quarter of 2001 and the events that led to Enron’s bankruptcy

as of December 1, 2001. The most important thing about this case is that you must support your conclusions with

evidence from Enron’s public filings only. Feel free to read as many articles as you would like to help with understanding

Enron, but only use information from the public filings (e.g. 10-Ks and 10-Qs). When analyzing the company please use the

Commonly Used Ratios that have been reviewed in past class discussions and cases (note: please don’t constrain your

analysis to the ratios, knowledge of the business, management discussion and disclosures are also helpful)

Requirements

Part I: In late February of 2001, you have 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 filed with the

SEC.

Your article must not be longer than 1,500 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.

Part II: On December 2, 2001, Enron Corporation has 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 first, second and third quarter 10-Qs.

In your 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? Use financial statement analysis as a tool. Hint:

don’t forget about the types of ratios you created & analyzed in the first article

3. Should Investors have been able to see this coming, especially if they had read your April 2001 article?

4. What actions, in any, could management of the company have taken to hold off bankruptcy?

 Who were the key stakeholders involved and how were they treated by the management team?

For this second article, Investor’s Monthly has given you a 1,000 word limit.

Extra Credit: Please let me know if you’d like to present a few creative PowerPoint slides summarizing each article