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1、IntroductionIn general, the collapse of Enron is perceived as one of the largest cop orate bankruptcy in American history. With the in-depth investigations of the companys financial standing, the SEC and AICPA start to tighten the regulations and accounting standards on the compulsory use of consoli
2、dation and equity method. In this essay, it will mainly concentrate on demonstrating the rise and fall of Enron and its underlying causes. As the manipulations of financial statements and other issues discover, the reliability and integrity of the accounting profession have been questioned. Case Ana
3、lysis/Evaluations of AlternativesWhy Enron was an admired company prior to 2000Between 1999 and 2000, the stock price of Enron grew by approximately 87% in just one year, which was far beyond the industry average (20% growth) and seemed to be unrealistic. (Healy & Palepu 2003, p. 5) At the time of 2
4、000, it was observed that the market capitalization was 70 times of Enrons earnings, which suggests that Enron was admired and most investors were very optimistic about its growth rates in future. (Healy & Palepu 2003, p. 5) It appears that the surges in Enrons stock prices made people believe that
5、this company was growing at an unprecedented rate. The share price of Enron in 2000 was more than 10 times of that in 1990 (from $7 to $90). (Healy & Palepu 2003, p. 6) Since the investors had trust and confidence in the market, it was believed that the stock price of Enron was not overvalued. Prior
6、 to 2000, Enron was a firm with market confidence and customer preferences. Apart from the strong financial performance of Enron, it also had a dominant position for energy trading in the international markets and was highly profitable. Besides, the company always come up with the most innovative st
7、rategy to lead the industry. (Healy & Palepu 2003, p. 6) In specific, by creating the energy derivative, Enron was able to be less affected by the price fluctuations and maintain a relatively stable profitability and cash flow.The Reasons for the rise and fall of EnronAs for the rise for the Enron,
8、the innovative business strategies play an important role in it. To reduce the influences of price fluctuations of energy, the energy derivative were introduced as the new strategy. (Ghemawat 2000) In 1990, Enron set up a new division called Enron Finance Corporation to keep track of the energy deri
9、vatives. Since Enron soon had the dominant market position for the energy derivative contracts, it established the solid relationships with suppliers and customers, which is considered as comparative advantages over its rivals. (Ghemawat 2000) As a matter of fact, the stability of prices contributes
10、 a lot to the outstanding financial performance of Enron as it is capable of forecasting the future trends of energy prices more precisely and accurately. Another important reason for its rise is that Enron was willing to adapt to the new environment and it paid great salaries and perks to attract t
11、he most skilled and talented staffs to work for it. After 1990, Enron starred to change its corporate culture and business model to cope with the increased globalization and the changes in customer demands. (Jenkins 2003) At the same time of hiring skilled employees, Enron also set up a new system t
12、o evaluate employee performance more objectively, which drives the monetary compensation for employee who stands out. It is shown that the fall of Enron was followed by a series of revenue restatements in 2001. It was announced by Enron that the revenues previously released for year 1997 to 2000 wer
13、e overstated and the actual amount was only 20% of them. (Jenkins 2003) Besides, the debt liabilities were much more than what it was stated in the financial statements. It turned out that Enron kept some of its liabilities and losses from investments off the balance sheet through the vehicle of its
14、 special purpose entity (SPE). As a consequence, the stock price of Enron dropped from $83 per share to nearly $0 in a few months, and then in November, Enron officially filed for bankruptcy due to the quickly shrinking equity capital. (Jenkins 2003) The accounting and auditing firm like Anderson fo
15、r Enron was held to be liable for its fall since it conducted the auditing for Enron for a long time and did not detect any contraventions of accounting standards before the bankruptcy. It was found that Anderson deliberately covered for some of the accounting frauds of Enron due to its conflicts of
16、 interests. Enron was one of its largest clients and the auditor received significant amounts of benefits ($25 million for auditing and $27 million for consulting) from it every year for auditing and consulting and hence the Anderson cannot risk losing this client. (Jenkins 2003) As a result, it should not be allowed for accounting firms to provide consulting services to its audit clients so as to reduce the conflicts of interests and to maintain the indepen
