Using Modified Altman, Chanos, Beneish; Examine Enron Corporation for 1997, 1998, 2000 & 2001 show as to how early financial fraud could be identified Introduction
The history of Enron corporation can be traced to the 1930s when the Northern Natural Gas Company, was formed in order to transport and market gas. The company formerly known as Northern Natural Company changed several times, as it made significant transformations in portfolio of its business activities and name. In 1980, Northern Gas Company became Inter North Inc, and then Enron Corporation in 1986. By the time Enron filed for bankruptcy the extent of its transformation and scope was so extensive that it was effectively overtrading. According to Tebogo (2011), Enron had around 3,500 foreign and US based subsidiaries and affiliated companies, which represented a huge holding, to be effectively controlled and managed. This rapid expansion led to the accumulation of a large amount of debt which was not effectively applied to yield returns thereby, increase the financial risk and bankruptcy risk of the company. The management of company in their quest to convince shareholders connived with Auther Anderson an auditing firm to engage in big bath accounting. By so doing, Enron came up with a strategy of a minimum $1 billion in annual profitability and a double growth rate of about 15%. In addition, the management adopted radical tactics such as selling energy contracts, called “prepays”, which facilitated the collection of cash before natural gas or related products were delivered. Enron further used hedging techniques to protect itself against uncertainty surrounding the long term energy contracts, and even pooled energy contracts in order to securitize and trade them as bond stocks. Moreover, it carried out a systematic policy of disposing off assets where management felt that the returns were not sufficiently high. The disposal was, however, effected by selling the assets to Special Purpose Vehicles (SPVs) meaning that there were no real economic benefits behind the disposal transactions, as in essence the SPVs were still a part of the Enron. To further conceal its ailing financial position from the market, Enron exploited the mark to market accounting concept, whereby positive changes in the value of assets and liabilities would be treated as revenues. But finally the cut was let out of the bag leading to the liquidation of the company in the year 2002 and the top management been charged with fraud. Fraud as was described by BPP (2009, pp.74), is an intentional act by one or more individuals among management, those charged with governance, employees or third parties involving the use of deception to obtain an unjust or illegal advantage. Financial fraud emanates from fraudulent financial reporting. This may include; manipulation, falsification or alteration of accounting records, misrepresentation of events, transactions or other significant information in the financial statements and intentional misapplication of accounting principles. Tebogo (2011) emphasised that, combating fraud requires effective fraud preventative measures such as a fraud risk management strategy, which is a symbol of senior management’s commitment to the elimination of fraud. There is also a need for periodically assessing organisations’ exposure to risk, so that where there are fraud schemes they could be detected early before the situation gets out of hand. In recent years, several major organisations have been implicated in the perpetration of fraud leading to an erosion of public trust in big corporations. It is in the face of recent events that the study seek to establish how early financial fraud can be identified using Pustlynick modified Altman, Chanos Algorithm and Beneish ratio taking Enron corporation as a case for the period of 1997 to 2001.
Data Collection Methodology
The data used in this study is based on the 10K filings made by Enron Corporation for the years...
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