Financial statements of Enron Waste Management
Executive Summary
Financial statements are developed to respond directly to reflect on the company financial history, current situation and project the future. In fact, through financial statements, a firm will be a better position to orient strategic management. Consequently, issues related to excesses, and losses can be singularized out this point. Financial statements have been applied to woo investors to get committed to the firm financial health. However, improper auditing of financial statement are applied to portray false figures and the firm illegal portrayal. In fact, recent strategies in the fraud arena have focused on using financial statement and a lucrative feint is overstatement of profits. The commencing analysis will attempt to examine the nature of fraud
Enron Waste Management
In October 2001, Enron Waste Managers conducted one of the most corrosive accounting fraud by twisting accounting practices and defrauding stakeholder over $ 6 billion American dollars. The fraud took centre stage in a span of five years. As a result, stakeholder presentations began complaining about the situation. The company senior management violated and aided corrupt individuals to process fraud incidences. Consequently, the management aided violations of antifraud, reporting and record/keeping provisions of federal securities laws. As part of the technicalities, Enron top management overstated earnings to a magnitude of 1.4 billion and this was a seductive approach to attract new investors.
Technically, fraudsters affiliated to the Enron, adjusted the SEC document to influence wooing of the funding. The management hired independent auditors who would earn additional fees for configuring reports to fraudulent orientation. To achieve this, waste management officials presented an illegal document called Proposed Adjusting Journal Entries. In fact, officials constantly refused to make corrections and instead of entering on closed door agreement with auditing bodies. This forced one auditing Anderson to write off the accumulated errors over ten year period this affecting reliable accounting practices. For this conduct, Andersen was forced to pay $ 220 million to Waste Management shareholder and $ 7 million to SEC.
However, this repayment was not satisfactory since waste management shareholders further lost $ 20.5 billion U.S dollars. Further to this, over eleven thousand Enron were laid off as part of the downsizing program to repay the amount resulted in the fraudulent activities. However, Enron had to pay Andersen along with the consulting fees and spin/off firm. Although Andersen was finally paid its auditing dues, it should be recalled that Andersen one of its largest client.
Following the development of Enron case, it became integral to respond to corporate scandals and this forced the American Congress to develop Sarbanes Oxley Act of 2002. The US congress envision a law which would minimize fraudulent. Many hearing in response to Enron case were devoted towards examining the role played by Arthur Andersen in influencing external information statement. Enron as well performed audits on WorldCom and Waste Management. Through the influence of Securities and Exchange Commission (SEC) banned Anderson from accepting new audit from clients.
Explain the causes of the frauds using the fraud triangle
There are two primary causes of fraud in an organization. One ethical factors causing greed, and two a general will to conduct fraud with intent to appeal to the public and potential investors. The list below shows potential causes of fraud in an organization. Firstly, this report identifies lack of transparency as the lid cause factor of fraud. Secondly, procuring of an non/independent internal audit department. In this case, an organization internal audit department is not independent and does not report according to the standard expectations. Thirdly, excessive complex organizational structure is as well primarily responsible for hindering revenue streams. Fourthly, improper provision of accounting controls. The organization constantly ignores documents such as bank reconciliation and this can be an early indication of corporate fraud. Sixthly, lack of proper moral direction from the executive encourages the development of unprofessionalism in auditing system.
To achieve corporate deceit, fraudsters develop a financial triangle one that strategizes on the nature of corporate fraud. On the top is the perceived opportunity. Fraudsters will convince the top executive on the possibility of a ghost opportunity. The goal is to make sure that the opportunity appears very legitimate on the short and long run. The fraudsters move to the next level, which is the incentives pressure. The pressure to build incentives is primarily oriented from the ability to orient fraud pressures constantly. Thirdly, the fraudsters create a rationalization policy one that seeks to approach the situation in more repellent. The goal here is to minimize visibility entirely.
Compare and contrast the causes of the frauds across the three international jurisdictions.
There are several similarities that explain similarities of the fraud cases in three jurisdiction, Australia, United Kingdom and United States, with the following companies HIH Insurance and Onetel of Australia, Enron and waste management of US, and Barings Bank and Equitable life Ins (UK). The three situations have common similarities and to some extent numerical differences. Firstly, as part of the similarities, it is notable that the three situations do involve top management in influencing decisions made and consequently altering the quality of auditing. However, as noted, there are a number of differences in each of the corporate fraud. In this case, the quality of auditing system is heavily debatable. One will notice that the level of involvement of auditing companies naturally differs. While Anderson, the principal auditing company for Enron was an integral engineer in Enron, other firms the situation is different with the auditing firms not being in central fraud planning section.
Part 2 XYZ Ltd
Balance Sheet Year 1 ($) Year 2 ($)
Assets
Current Assets
Cash 45,000 15,000
Accounts Receivable 150,000 200,000
Inventory 75,000 150,000
Fixed Assets (net) 60,000 60,000
Total Assets 330,000 425,000
Accounts Payable 95,000 215,000
Long/term Debt 60,000 60,000
Total Liabilities 155,000 275,000
Stockholder’s Equity
Reserves 25,000 25,000
Paid/up Capital 75,000 75,000
Retained Earnings 75,000 50,000
Total 175,000 150,000
330,000 425,000
INCOME STATEMENT
Net Sales 250,000 450,000
Opening Inventory 55,000 75,000
Purchases 145,000 375,000
Closing Inventory /75,000 /150,000
Cost of Goods 125,000 300,000
Gross Margin 125,000 150,000
Operating Expenses
Selling Expenses 50,000 75,000
Administrative Expenses 60,000 100,000
Net Income 15,000 /25,000
Additional Information
Average Net Receivables 150,000 210,000
Required:
Apply horizontal and vertical analysis to the financial statements of XYZ Ltd
Horizontal, reports each amount on the financial statement in comparison to another item. Each item on the balance sheet is configured in relation to the total assets.
Cash
45,000/ 45,000=100%
Against
15,000/45,000=33.33%
Accounts Receivable
150,000/150,000=100
Against
200,000/150,000=133.33
Inventory
75,000 /75,000=100%
Against
150,000/75,000=200%
Fixed Assets
60,000/60,000=100
Against,
60,000/60,000=100
On the other hand, the Vertical analysis ensures the percentage amount is presented in relation to sales. The figures are listed from the income statement.
Sales, 250,000/250,000=100%
Against
450,000/250,000=180%
Cost of goods
125,000/125,000=100%
Against
125,000/300,000=240 %
Gross Margin 125,000/125,000=100%
Against 125,000/150,000=120%
This analysis attempts to reveal relationships among items on the financial statement and trends of individual items, which occur with time. The relationship guides this report in making a better and sound judgment on what current performance of the company. In fact, the two major techniques vertical analysis, and horizontal analysis are imperative in aiding the understanding of the firm’s health.
b) Undertake ratio analysis for years 1 and 2.
Ration analysis in financial statements is applied to obtain a proper indication of a firm total financial performance in key areas. This approach will guide this report to determine debt management rations, assets management rations, market value rations, and profitability rations. The approach further guides computation ratios and facilitates the comparison of the firm total industry competitiveness. The accounting information provided is based on the nature of historical costing mechanism. Hence, it is good to note
Current Ration = Total Current Assets/ Total current liabilities
Year One= 330,000/155,000 =2.12
Against Year Two = 425,000/275,000= 1.54
Inventory Turnover= COGS/ Inventory
Year one, 125,000/ 75,000=1.66
Against year two=300,000/150,000= 1.5
Fixed Assets Turnover= Days 365/ Net Fixed Assets
Year One, 365/60,000=0.006
Against Year Two, 365/60,000=0.006
Total Assets Turnover = Sales/ Total Assets
Year One, 250,000/330, 000=0.75
Against Year Two, 450,000/425,000=1.05
Profit Margin = Net Income/ Sales
Year one, 15,000/250,000=0.06
Against Year Two,
25,000/450,000=0.055
Return on Assets= Net Income/ Total Assets
Year One, 15,000/330,000=0.045
Against Year two, 25,000/ 425,000=0.058
Identify any trends and abnormalities in the financial statement and provide possible explanation.
A key thing which as been identified from this financial statement is limitation from ration analysis. The financial statement places emphasis on indicators and key rations. It is abnormal since there is no single measure, which is capable of capturing relevant and important information on the company. In this company, the calculation on different rations happens to be the starting point. Analysis requires development of ratios, understating of reasons and forming expectations. The overarching rule of a ration is in fact ought to be and depends on the nature of particular of the industry that the financial statement is adopted from.
Consequently, from the financial statement one will notice the ratios are expected to be generated on a benchmark framework. After looking at the financial statement, one fails to notice this framework. Additionally, from the above financial statement, one will notice that they will be non-operating items; for instance, judgements include effects on the comparison between year and year two. While this approach seems legitimate, it is more meaningful to ignore effects on items and the financial ratio. For this reason, one will notice that ratios mean that there is a comparison between past ratios is not specified on given industrial or business standard. The financial statement is basically blank and does not demonstrate proper or what can be considered coherent information.
To analyse this, the best possible option is applying financial statement, which does place greater emphasis on the summary of key ration and current ration. However, as stated, there is lacks a single approach that seek to merge a single approach into a collective financial statement. It should further be noted that the possibility of engaging on window dressing presents a working challenge. Based on these two, one will notice that the above financial statement are ratios computed using standard numbers and this presents serious problems which can evoke fraudulent activities.
d) Identify the related accounts that the forensic accountant might want to further investigate.
A forensic auditor may identify the contra account and how it can be applied to offset inefficiencies in the financial statement. A contract account builds normal debit balance and creates a credit balance. The contra account is vital since it is deducted from the balance of the related assets accounts in the financial statement and resulting difference is understood as the book of assets. Improvising the contract account ensures that journal entry reduces the overall book value of assets.
In fact, the forensic accountant will be in a better position to derive a contra assets accounts. This is regular account that carriers a debit balance and also carriers a credit balance. The advantages of a contra account are that it carries doubtful accounts on accumulated depreciation depression. The accounts also create an allowance for doubtful account, which offsets a company accounts. Secondly, a contra account creates a liability account. The credit balance created has a common liability on accounts. This ensures that cash receivables are issued on a bond on maturity.
The contra account also creates a contra revenue account. This allows the creation of sales allowance, sale returns and sale discounts. The accounts also creates total amount of company’s revenue.
Conclusion
