I have 2 assignment done they are about financial investigation class. company is enron

The company that I am choosing for my project is Enron Enron's came into existence in the year 1985 when it began its life as an interstate pipeline company through merger of the Houston Natural Gas and Omaha-based InterNorth. Kenneth Lay, who was the former chief executive officer of Houston Natural Gas, became the CEO and the following year he won the post of the chairman. From pipeline sector, Enron began moving into the new fields. In the year1999, the company launched its broadband services unit and the Enron Online, company's website for trading the commodities, which soon became largest business site in world. About 90 per cent of the income eventually came from the trades over Enron Online. The growth for Enron was rapid. In the year 2000, the company's annual revenue reached$100 billion US Dollars. At this time it was ranked as the seventh-largest company on Fortune 500 and sixth-largest energy company in the world. The stock of the company price peaked at $90 US. In 2001, second of December Enron Corporation filed its bankruptcy which was the largest in U.S. History. This is bankruptcy that is becoming infamous and it was highly publicized. The major factors which steered to the failure of this corporation comprised of mismanagement of company's funds, poor business and accounting procedures and the greed of top executives. At the point when Jeffrey Skilling was contracted, they came up with a staff of executives that used the accounting loopholes, special purpose units and the poor reporting of financial activities that they took it to their advantage in order to hide billions of dollars in the debt that came about due to the failure of projects. The Chief Financial Officer at that time who was Andrew Fas tow and other executives of this company did not only mislead company's board of directors and the other auditing committee that was dealing with the high risk practices of accounting, but they also exerted pressure on Andersen so as to ignore the issues that had been identified. This was the major reason which led to bankruptcy of Enron. Sources McLean, B and Elkin, P, (2004). Smartest Guys in Room: The Amazing Rise and the Scandalous Fall of Enron (2th Edition). Assignment 1 (company) Using the company chosen, complete the following requirements: Provide a full essay detailing the fraudulent or illegal activities that were committed. Include background on the company culture as well as background on the major players in the fraud. Show, through the financial statements, notes, and ratio analysis, how this fraud could have been detected. The focus this week should be on effects on revenue and expenses. Make sure to demonstrate effective usage of English grammar and mechanics. The result should be an APA formatted document, to include a title page and reference page. The Online Library is an excellent place to begin your research. You will need to identify a minimum of 3 sources. Include at least 2 Assignment 2 (company) You identified a company that experienced fraudulent activity. This week you will further research the company and the fraudulent activities that took place. This week for your project, you will need to do the following: Show through the financial statements, notes, and ratio analysis how this fraud could have been detected. This week your focus should be on assets and liabilities. What was the court decision in the case, where are the major players today, what was the impact on the company of the fraud. Make sure to demonstrate effective usage of English grammar and mechanics. The result should be an APA formatted document, to include a title page and reference page. Looking back at Enron, perhaps a company that was best known for committing the accounting fraud, one is able see the many methods which were utilized in order to fraudulently improve appearance of the financial statements. Through use of the off balance sheet special purpose vehicles the firm continued to hide the liabilities and to inflate its earnings. In 1999, limited partnerships were created for the purpose of purchasing Enron shares as means of improving the performance of its stock. That year, the company returned 56% to the shareholders, which was followed by another 87% appreciation at onset of new millennium. As Enron's aggressive accounting practices and the financial statement manipulation began to spiral out of their control, the scandal was eventually uncovered by Wall Street Journal. Shortly after, on December 2, 2001 Enron filed for the Chapter 11 in what was largest in the U.S. bankruptcy in history. Enron Corporation, which appeared to be very strong until December 2001, made voluntary decision to restate the financial statements. This proved to be fatal and the corporation had to go for bankruptcy (Cernusca & Dima 2007). While bankruptcy of the small company is taken as a routine, Enron's case is of difference as the company was ranked seventh by the Fortune 500(Cernusca & Dima 2007; Kroger, 2004). During 1990s, Enron expended quickly into the several areas such as the developing powers plant and the pipeline. This expansion, however, required the large initial capital investments and the long gestation period. By this time, Enron already raised lots of debt funds from market and hence any other attempt to raise the funds would affect the Enron's credit rating. But Enron had to maintain credit ranking at the investment rate in order to continue with its business. On top of that, the company wasn't making enough profits either, as it had promised to the investors. Hence, Enron began making the partnerships and other special arrangements (Cernusca & Dima 2007; Kroger, 2004). These companies were used to keep Enron's debts and the losses away from its balance sheets, therefore allowing it to have a good credit rating and look good in front of its investors. Enron's ultimate goal was to overcome rules of the consolidation and, in the same time, still increase the credibility. If a parent company financed less than 97% of the initial investment in a SPE, it didn't have to consolidate in into own accounts (Cernusca & Dima 2007; Kroger, 2004). In order to achieve the non-consolidation, according to GAAP, two conditions should be met: - The assets must be legally isolated from transferor and an independent third party owner has to make substantive capital investment which should amount to 3% of the SPE's total capitalization (Cernusca & Dima 2007). The independent third party owner must exercise the control over SPE in order to avoid the consolidation. If properly done, the legal isolation and third party control over the SPE reduces the risk of credit. Therefore, off-balance sheet treatment of such SPE involves enough of the third party equity. ENRON data 1997 1998 1999 2000 2001 Current assets 4,113,000 5,933,000 7,255,000 30,381,000 29,167,000 Current liabilities 3,856,000 6,107,000 6,759,000,00 0 28,406,000,00 0 27,570,000 Working capital 257,000 -174,000 496,000 1,975,000 1,597,000 Total assets 22,552,000 29,350,000 33,381,000 65,503,000 67,260,000 Retained earnings 1,852,000 2,226,000 2,698,000 3,226,000 3,525,000 EBIT 565,000 1,582,000 1,995,000 2,482,000 795,000 Market value of equity 6,600,000 9,500,000 32,100,000 62,500,000 62,500,000 Book value of total liabilities 14,800,000 19,200,000 20,400,000 50,700,000 55,533,000 sales 20,273,000 31,260,000 40,112,000 100,789,000 50,129,000 Asset quality index= (1-current assets+ net fixed assets/total assets) previous year / (1-current assets+ net fixed assets/total assets) Total accruals of total assets= change in net working capital-change in cash-change in current taxes payable-depreciation &amortization/total assets 1997 1998 1999 2000 2001 Asset quality index 1.308 1.363 1.314 1.471 1.479 Total accruals of total assets 0.109 0.187 0.135 0.053 0.048 Debt climbed from $3.5 billion in 1996 to $13 billion in 2001. The fraud in assets and liabilities could have been detected using the following ways: 1) Modified Altman's Z-score The modified Altman Z-score provides a way of predicting the corporate failure, but it differs from original model in sense that it can be applied to the non-manufacturing sectors (Tebogo, 2011).The original Altman's Z-score model was based on two major conditions, which were: the company should have the publicly traded stock as well as the manufacturing outfit. The modified Altman, however, could be used in analyzing the manufacturing and non-manufacturing companies, including those with publicly traded stocks (Altman, 2005). This feature makes it to be ideal for the use in analyzing the performance of the entities such as Enron (Tebogo, 2011). The modified Z-score model, however, carries only few variables from the original Altman (1968) model and may be expressed in a way that suits investigation (Tebogo, 2011). For instance, it has been expressed as (3.3*EBIT + 1.0*Sales +1.4*Retained Earnings + 1.2*Working Capital)/Total assets by Schallhein and Wells (2006). According to Nugent, Pustylnick and Anderson (2010) Igor Pustlynick developed the modified Altman model that has been expressed as: Z = 1.2x1 + 1.4x2 + 3.3x3 + 0.6x4 + 1.0x5, where: X1 = Shareholders Equity / Total Assets x 1.2 X2 = Retained earnings / Total Assets x .014 X3 = EBIT / Total Assets x .033 X4 = Market value of Equity /Total Debt x .006 X5 = Revenue / Total Assets x .999 The Pustylnick Modified Altman index for Enron shows that, from 1997 to 2001, the modified scores were lower than 1.8 e.g. 1997, 1998 and 1999 the modified Z-scores were 1.252, 1.424 and 1.625 respectively. Such a low Z- score is indication that the company is on brink of bankruptcy (Altman, 2005; Caouette et. al., 2008; Nugent, 2003; Calandro, 2007). Should such an analysis of the Z-score have been done and been monitored in case of Enron, it could possible that the analysts could have identified a problem much earlier as 1998 or 1999, and possibly helped to stop the rot that occured. This implies that although the companies can manipulate financial data it is still possible that the deceit could be uncovered where a proper investigation is done. 1997 1998 1999 2000 2001 X1 0.288 0.288 0.344 0.210 0.351 X2 0.001 0.001 0.001 0.001 0.001 X3 0.001 0.002 0.001 0.001 0.001 X4 0.003 0.003 0.009 0.007 0.007 X5 0.899 1.069 1.199 1.538 0.749 Modified Z score 1.251 1.424 1.625 1.799 1.179 2) Altman's Z-score bankruptcy predictor The Altman's Z-score formula for predicting the bankruptcy was published in the year1968 by Edward I. Altman who was, an Assistant Professor of Finance at New York University (Caouette, Altman, Narayanan & Nimmo, 2008) The Altman's Z score model is: Z = 1.2x1 + 1.4x2 + 3.3x3 + 6.0x4 + 1.0x5, where: x1, represents the working capital/ total assets ratio x2 represents the retained earnings/ total assets ratio x3 represents the earnings before interest and taxes/ total assets x4 represents the market value/ book value of total debt x5 represents the sales/ total assets Z represents the entire index. The formula can be used to predict probability that the firm will go into bankruptcy within the two years. Z-scores are used to predict the corporate defaults and an easy way to calculate the control measure for financial distress status of the companies in academic studies. The Z- score uses multiple corporate income and the balance sheet values to measure financial health of the company (Caouette et. al., 2008). A bankruptcy prediction implies that there could be a fraudulent activity on-going or it is yet to occur. Altman's Z-Score bankruptcy predictor uses the combination of the financial ratios to determine whether the bankruptcy is on horizon (Caouette et. al., 2008).If score is 3.0 or above (safe zone); bankruptcy is not likely to occur if the score is 1.8or less (distress level) bankruptcy is likely. A score between 1.8 and 3.0 is the grey area. Probabilities of the bankruptcy within the above ranges that are 95% for one year and are 70% within the two years. If financial ratios are not very high enough; it shows that the business inefficiency that could have been caused by the fraudulent activity. Obviously, the higher the score is desirable (Caouette et. al., 2008; Nugent, 2003; Calandro, 2007). Consequently as illustrated in 1997 and 1998; Enron's Z-Score was well below that 'distress' level (1.8); although it increased slightly in 1999 and 2000, the Z-Score still remains well below the 'safe zone' (3.0). In 2001 the Z-score was again around 1.8. There was therefore an ample sign of the possibility of bankruptcy Enron using Altman's Z-score Bankruptcy Predictor. Using the Altman's Z-score Bankruptcy Predictor, the fraud might have been detected as early as year 1998 at worse 1999. This is because the Z-scores for year 1997 and 1998 were 1.38 and 1.64 respectively, which were far below Z-score of 1.8 which is a good indication that bankruptcy is likely (Caouette et. al., 2008; Nugent, 2003; Calandro, 2007). Enron Z score 1997 1998 1999 2000 2001 X1 0.01 -0.01 0.01 0.03 0.02 X2 0.08 0.08 0.08 0.05 0.05 X3 0.03 0.05 0.06 0.04 0.01 X4 0.45 0.49 1.57 1.23 1.13 X5 0.9 1.07 1.2 1.54 0.75 Z 1.38 1.94 2.47 2.51 1.56 Safe zone 3.0 and above Distress zone 1.8-2.9 Court decision in Enron case Enron former chief executive Jeffrey Skilling and the founder Kenneth Lay were both found guilty of conspiracy and fraud in granddaddy of all the corporate fraud cases. On the sixth day of the deliberations, a jury of eight women with four men convicted the former executives for misleading the public about true financial health of Enron, whose collapse in the late 2001 symbolized the wave of corporate fraud that swept the United States early in the decade. In the year 2013 the judge reduced Skilling sentence by 10 years where he paid 42 million which was distributed to the shareholders and in 2015 was barred from act as an officer or director of a publicly traded company. The company was bailed out by the government and this year the federal judge dismissed claims a class union against UBS accused of hiding fraud of Enron committed by former client. References Cernusca, L., & Dima, C. (2007). Fraud Case Analysis: Enron Corporation. Kroger, J., R, (2004). Enron, Fraud and Securities Reform: An Enron Prosecutor's Perspective Ferrell, O. C., Fraedrich, J., & Ferrell, L, (2007) Business Ethics: Ethical Decision Making and Cases (8th Eds). Ohio: Cengage Learning. Tebogo, B,(2011).Does the Enron Case Study Provide Valuable Lessons in the Early Detection of Corporate Fraud & Failure. The specific actions that led to Enron bankruptcy The year 2001, second of December Enron Corporation filed the bankruptcy which was one of the largest in the U.S. History. This is one of the bankruptcies that is becoming more infamous and was highly publicized. The major factors which steered to the failure of this corporation were mismanagement of the company's funds, the poor business and accounting procedures and the greed of the top executives. At the time when Jeffrey Skilling was contracted, he came up with the staff of executives who used accounting loopholes, special purpose units and the poor reporting of the financial activities that they took it to their own advantage to hide billions of dollars in debt that came about due to the failure of projects. The Chief Financial Officer at the time; Andrew Fas tow and the other executives of the company did not only mislead company's board of directors and the other audit committee that was dealing with high risk practices in accounting, but they also exerted pressure on Andersen in order to ignore issues which had been identified. This is a major reason that led to bankruptcy of Enron. Types of fundamental accounting and auditing practices which led to fraud at Enron. The complex financial statements which were very confusing to shareholders and the analysts that was being involved. Furthermore, the complex business model and the other unethical practices made the company to use the accounting limitations so as to be able to misrepresent revenues and to carry out modification on balance sheet so as to show the good performance. When Skilling was hired he constantly kept his efforts on the achieving the Wall Street expectations whereby he was advocating for the use of mark to market accounting and kept pressure to the executives of the company to come up with the ways of hiding their debts. Ethical environment that led to fraud at Enron Code of ethics of Enron was basically based on the respect, communication, integrity and the excellence. The culture of this company had much to do with ethics scandal. The company was very harsh and superior organization; they basically laid the emphasis on the competition and financial goals. Enron had hopes that rating system could encourage employees to be able to work hard; this led to opposite where it led to the great harm for the company. The competitive environment and the evaluation standards majorly led to culture of deception. Since the personnel were very nervous that they might lose their jobs, the employees of this company were looking for the means in which the can perform effectively hence they ignored ethical standards and they focused on achieving of financial goals. The competitive environment that greatly led to the lack of presentation of the various errors which led to cheating majorly because the employees acted in a very uncooperative manner with each other. Employees were not required to ask questions because it was seeing as a way of humiliation to the company. The culture of Enron was concerned with the achievement of the financial goals. This is what led to the downfall of the company. Detection of fraud by use of financial statements basically revenues and expenses. The fraud could have been detected using; 1) gross margin test According to Nugent (2003), gross margin is the net sales minus cost of goods sold and test is a crucial determinant of the business success as it measures the operational efficiency. An increasing gross margin or the converging is an indication of the increasing profitability and operational efficiency (Nugent, 2003).A business will always attempt to achieve highest gross profit margin possible. Low profit margins will be indicator to risk. However, the lower profit margins are more credible when turnover is high. Furthermore, Clayton and Ellison, (2011) also averred that the diverging gross margin can also imply fraudulent activity. Applying Gross Margin Test to the Enron's case, is obvious that Enron's gross margin shows decrease of 52% from 1996 to 1997. It was diverging and indicating the operational inefficiencies (Nugent, 2003). There was an increase of about 4% from 1997 to 1998; a decrease of 2% from year 1998 to 1999; no movement from year 1999 to 2000; and a decrease of 1% from year 2000 to 2001. This means that as at 1997, there was a major sign that Enron was really experiencing serious operational inefficiencies. Also, while annual differences from the year 1998 to 2001 were only the minor. The fact that they were fluctuating each year, down the next and so on, indicates that financial statements were being tampered with; in terms of the items not being reported in correct financial period (Nugent, 2003). It is consequently ostensible that using Gross Margin Test, (Nugent, 2003; Clayton & Ellison, 2011; Obiri, 2011) Enron's fraud could have been detected sooner. Gross margin Decrease/increas e 1997 0% -52% 1998 4% 4% 1999 2% 2% 2000 2% 0% 2001 1% -1% 2) Beneish model Wells (2001) wrote about irrational ratios, which have proven to be helpful in detecting the manipulation of the financial statements courtesy of Professor Messod Beneish, accounting lecturer in the Kelly School of Business at Indiana University. In his paper, Wells (2001) mentioned that following the ratios as critical in detecting the financial statement fraud: Days Sales in Receivables, Gross Margin Index, Asset Quality Index, Sales Growth Index and Total Accruals to Total Assets Index. According to the Beneish ratios, the Days Sales Receivables Index should be around 1.465 for manipulators and 1.030 for the non-manipulators. The analysis as at 2000 that there was a possible red flag since the index had exceeded the non-manipulation benchmark. Similarly, there could have been some concern in year 2001 when index reached 1.487. This reflected attempt by Enron to boost the sales revenue by extending the credit terms to its customers; an indication of the operating myopia. In addition, the Gross Margin Index was excessively high in most of the period investigated except in year1998, when it was 0.0168. According to Beneish, the index should be around 1.193 for the manipulators but 1.014 for the non-manipulators. From the analysis, it is very clear that there was gross manipulation of the financial information in 1997, 1999, 2000 and 2001 hence if the adequate and proper investigations were done could have become the apparent much earlier that something was amiss. As public company, Enron wanted to portray good financial performance to the shareholders, and the management knew that as long as the financial results were satisfactory the financial markets would have reacted by keeping the share prices high (Tebogo, 2011). The chances for the earnings manipulation were therefore very high hence the investigators should have been cautious of reported results, and taken the decision to place it under the watch much earlier. Reflecting on performance of Enron in year 1998, when the index was 0.0168, this could have put the management under pressure to show more favorable results in the subsequent years hence the increase seen from year1999 onwards (Tebogo, 2011). According to Beneish Model, Assets Quality Index should be around 1.039 for the nonmanipulators and 1.254 for the manipulators. In all years investigated, the index exceeded the non-manipulation benchmark, which possibly indicated that Enron was capitalizing the costs rather than reporting them as per period expenses (Tebogo, 2011). Enron would have done this in order to be able to improve the reported profits in short term, which is consistent with analysis done for the Days Sales Receivables and Gross Margin indices. Effectively, Enron was hiding costs as non-current assets (Tebogo, 2011). From the data analysis in the Sales Growth index showed the signs of manipulation. According to Beneish, this ratio should range from 1.134 for non-manipulators to 1.607 for manipulators. Between 1997 and 1999 the index was above the non-manipulator benchmark, which should have been a red flag hence, auditors and other investigators should have raised alarm. And, in 2000 the index was at 2.513, a level that was far above the manipulator benchmark. This should have raised suspicion that the company was perhaps reporting phony sales given the astronomical growth in sales revenue. That is, during the period investigated Enron revenues were growing at exponential rates (Tebogo, 2011). An increase in Total Accruals to Total Assets index is a possible indication that management is trying to manipulate earning through a discretionary authority over the accruals policy. The Beneish model indicates that an index of 0.018 is a sign that there is no financial statements manipulation, while anything from 0.031 and above is an indication of tampering with financial data. And, in the case of Enron it was evident that for all the years reviewed, the indices were all above 0.031, a credible sign that Enron was manipulating earnings by exploiting its credit policy. It is therefore worth noting that all the five Beneish indices above show that there was something going on wrong. Therefore using the Beneish Model, the fraud at Enron could have been detected sooner. Index Days sales in receivables index Gross margin index Asset quality index Sales growth index Total accruals to total asset index 1997 0.625 1998 0.148 1999 0.956 2000 1.376 2001 1.487 70.175 0.0168 2.205 1.232 1.401 1.308 1.363 1.314 1.471 1.479 1.526 1.542 1.283 2.513 0.497 0.190 0.187 0.135 0.053 0.048 References McLean, B and Elkin, P, (2004). Smartest Guys in the Room; the Amazing Rise and Scandalous Fall of Enron (2th Edition). Bratton, William W. (May 2002). Does Corporate Law Protect the Interests of Shareholders and Other Stakeholders? Enron and the Dark Side of Shareholder Value; New Orleans: Tulane University Law School. Tebogo, B.(2011).Does the Enron Case Study Provide Valuable Lessons in the Early Detection of Corporate Fraud & Failure. Benston, George J. (November 6, 2003). "The Quality of Corporate Financial Statements and Their Auditors before and After Enron" Looking back at Enron, perhaps a company that was best known for committing the accounting fraud, one is able see the many methods which were utilized in order to fraudulently improve appearance of the financial statements. Through use of the off balance sheet special purpose vehicles the firm continued to hide the liabilities and to inflate its earnings. In 1999, limited partnerships were created for the purpose of purchasing Enron shares as means of improving the performance of its stock. That year, the company returned 56% to the shareholders, which was followed by another 87% appreciation at onset of new millennium. As Enron's aggressive accounting practices and the financial statement manipulation began to spiral out of their control, the scandal was eventually uncovered by Wall Street Journal. Shortly after, on December 2, 2001 Enron filed for the Chapter 11 in what was largest in the U.S. bankruptcy in history. Enron Corporation, which appeared to be very strong until December 2001, made voluntary decision to restate the financial statements. This proved to be fatal and the corporation had to go for bankruptcy (Cernusca & Dima 2007). While bankruptcy of the small company is taken as a routine, Enron's case is of difference as the company was ranked seventh by the Fortune 500(Cernusca & Dima 2007; Kroger, 2004). During 1990s, Enron expended quickly into the several areas such as the developing powers plant and the pipeline. This expansion, however, required the large initial capital investments and the long gestation period. By this time, Enron already raised lots of debt funds from market and hence any other attempt to raise the funds would affect the Enron's credit rating. But Enron had to maintain credit ranking at the investment rate in order to continue with its business. On top of that, the company wasn't making enough profits either, as it had promised to the investors. Hence, Enron began making the partnerships and other special arrangements (Cernusca & Dima 2007; Kroger, 2004). These companies were used to keep Enron's debts and the losses away from its balance sheets, therefore allowing it to have a good credit rating and look good in front of its investors. Enron's ultimate goal was to overcome rules of the consolidation and, in the same time, still increase the credibility. If a parent company financed less than 97% of the initial investment in a SPE, it didn't have to consolidate in into own accounts (Cernusca & Dima 2007; Kroger, 2004). In order to achieve the non-consolidation, according to GAAP, two conditions should be met: - The assets must be legally isolated from transferor and an independent third party owner has to make substantive capital investment which should amount to 3% of the SPE's total capitalization (Cernusca & Dima 2007). The independent third party owner must exercise the control over SPE in order to avoid the consolidation. If properly done, the legal isolation and third party control over the SPE reduces the risk of credit. Therefore, off-balance sheet treatment of such SPE involves enough of the third party equity. ENRON data 1997 1998 1999 2000 2001 Current assets 4,113,000 5,933,000 7,255,000 30,381,000 29,167,000 Current liabilities 3,856,000 6,107,000 6,759,000,00 0 28,406,000,00 0 27,570,000 Working capital 257,000 -174,000 496,000 1,975,000 1,597,000 Total assets 22,552,000 29,350,000 33,381,000 65,503,000 67,260,000 Retained earnings 1,852,000 2,226,000 2,698,000 3,226,000 3,525,000 EBIT 565,000 1,582,000 1,995,000 2,482,000 795,000 Market value of equity 6,600,000 9,500,000 32,100,000 62,500,000 62,500,000 Book value of total liabilities 14,800,000 19,200,000 20,400,000 50,700,000 55,533,000 sales 20,273,000 31,260,000 40,112,000 100,789,000 50,129,000 Asset quality index= (1-current assets+ net fixed assets/total assets) previous year / (1-current assets+ net fixed assets/total assets) Total accruals of total assets= change in net working capital-change in cash-change in current taxes payable-depreciation &amortization/total assets 1997 1998 1999 2000 2001 Asset quality index 1.308 1.363 1.314 1.471 1.479 Total accruals of total assets 0.109 0.187 0.135 0.053 0.048 Debt climbed from $3.5 billion in 1996 to $13 billion in 2001. The fraud in assets and liabilities could have been detected using the following ways: 1) Modified Altman's Z-score The modified Altman Z-score provides a way of predicting the corporate failure, but it differs from original model in sense that it can be applied to the non-manufacturing sectors (Tebogo, 2011).The original Altman's Z-score model was based on two major conditions, which were: the company should have the publicly traded stock as well as the manufacturing outfit. The modified Altman, however, could be used in analyzing the manufacturing and non-manufacturing companies, including those with publicly traded stocks (Altman, 2005). This feature makes it to be ideal for the use in analyzing the performance of the entities such as Enron (Tebogo, 2011). The modified Z-score model, however, carries only few variables from the original Altman (1968) model and may be expressed in a way that suits investigation (Tebogo, 2011). For instance, it has been expressed as (3.3*EBIT + 1.0*Sales +1.4*Retained Earnings + 1.2*Working Capital)/Total assets by Schallhein and Wells (2006). According to Nugent, Pustylnick and Anderson (2010) Igor Pustlynick developed the modified Altman model that has been expressed as: Z = 1.2x1 + 1.4x2 + 3.3x3 + 0.6x4 + 1.0x5, where: X1 = Shareholders Equity / Total Assets x 1.2 X2 = Retained earnings / Total Assets x .014 X3 = EBIT / Total Assets x .033 X4 = Market value of Equity /Total Debt x .006 X5 = Revenue / Total Assets x .999 The Pustylnick Modified Altman index for Enron shows that, from 1997 to 2001, the modified scores were lower than 1.8 e.g. 1997, 1998 and 1999 the modified Z-scores were 1.252, 1.424 and 1.625 respectively. Such a low Z- score is indication that the company is on brink of bankruptcy (Altman, 2005; Caouette et. al., 2008; Nugent, 2003; Calandro, 2007). Should such an analysis of the Z-score have been done and been monitored in case of Enron, it could possible that the analysts could have identified a problem much earlier as 1998 or 1999, and possibly helped to stop the rot that occured. This implies that although the companies can manipulate financial data it is still possible that the deceit could be uncovered where a proper investigation is done. 1997 1998 1999 2000 2001 X1 0.288 0.288 0.344 0.210 0.351 X2 0.001 0.001 0.001 0.001 0.001 X3 0.001 0.002 0.001 0.001 0.001 X4 0.003 0.003 0.009 0.007 0.007 X5 0.899 1.069 1.199 1.538 0.749 Modified Z score 1.251 1.424 1.625 1.799 1.179 2) Altman's Z-score bankruptcy predictor The Altman's Z-score formula for predicting the bankruptcy was published in the year1968 by Edward I. Altman who was, an Assistant Professor of Finance at New York University (Caouette, Altman, Narayanan & Nimmo, 2008) The Altman's Z score model is: Z = 1.2x1 + 1.4x2 + 3.3x3 + 6.0x4 + 1.0x5, where: x1, represents the working capital/ total assets ratio x2 represents the retained earnings/ total assets ratio x3 represents the earnings before interest and taxes/ total assets x4 represents the market value/ book value of total debt x5 represents the sales/ total assets Z represents the entire index. The formula can be used to predict probability that the firm will go into bankruptcy within the two years. Z-scores are used to predict the corporate defaults and an easy way to calculate the control measure for financial distress status of the companies in academic studies. The Z- score uses multiple corporate income and the balance sheet values to measure financial health of the company (Caouette et. al., 2008). A bankruptcy prediction implies that there could be a fraudulent activity on-going or it is yet to occur. Altman's Z-Score bankruptcy predictor uses the combination of the financial ratios to determine whether the bankruptcy is on horizon (Caouette et. al., 2008).If score is 3.0 or above (safe zone); bankruptcy is not likely to occur if the score is 1.8or less (distress level) bankruptcy is likely. A score between 1.8 and 3.0 is the grey area. Probabilities of the bankruptcy within the above ranges that are 95% for one year and are 70% within the two years. If financial ratios are not very high enough; it shows that the business inefficiency that could have been caused by the fraudulent activity. Obviously, the higher the score is desirable (Caouette et. al., 2008; Nugent, 2003; Calandro, 2007). Consequently as illustrated in 1997 and 1998; Enron's Z-Score was well below that 'distress' level (1.8); although it increased slightly in 1999 and 2000, the Z-Score still remains well below the 'safe zone' (3.0). In 2001 the Z-score was again around 1.8. There was therefore an ample sign of the possibility of bankruptcy Enron using Altman's Z-score Bankruptcy Predictor. Using the Altman's Z-score Bankruptcy Predictor, the fraud might have been detected as early as year 1998 at worse 1999. This is because the Z-scores for year 1997 and 1998 were 1.38 and 1.64 respectively, which were far below Z-score of 1.8 which is a good indication that bankruptcy is likely (Caouette et. al., 2008; Nugent, 2003; Calandro, 2007). Enron Z score 1997 1998 1999 2000 2001 X1 0.01 -0.01 0.01 0.03 0.02 X2 0.08 0.08 0.08 0.05 0.05 X3 0.03 0.05 0.06 0.04 0.01 X4 0.45 0.49 1.57 1.23 1.13 X5 0.9 1.07 1.2 1.54 0.75 Z 1.38 1.94 2.47 2.51 1.56 Safe zone 3.0 and above Distress zone 1.8-2.9 Court decision in Enron case Enron former chief executive Jeffrey Skilling and the founder Kenneth Lay were both found guilty of conspiracy and fraud in granddaddy of all the corporate fraud cases. On the sixth day of the deliberations, a jury of eight women with four men convicted the former executives for misleading the public about true financial health of Enron, whose collapse in the late 2001 symbolized the wave of corporate fraud that swept the United States early in the decade. In the year 2013 the judge reduced Skilling sentence by 10 years where he paid 42 million which was distributed to the shareholders and in 2015 was barred from act as an officer or director of a publicly traded company. The company was bailed out by the government and this year the federal judge dismissed claims a class union against UBS accused of hiding fraud of Enron committed by former client. References Cernusca, L., & Dima, C. (2007). Fraud Case Analysis: Enron Corporation. Kroger, J., R, (2004). Enron, Fraud and Securities Reform: An Enron Prosecutor's Perspective Ferrell, O. C., Fraedrich, J., & Ferrell, L, (2007) Business Ethics: Ethical Decision Making and Cases (8th Eds). Ohio: Cengage Learning. Tebogo, B,(2011).Does the Enron Case Study Provide Valuable Lessons in the Early Detection of Corporate Fraud & Failure. The specific actions that led to Enron bankruptcy The year 2001, second of December Enron Corporation filed the bankruptcy which was one of the largest in the U.S. History. This is one of the bankruptcies that is becoming more infamous and was highly publicized. The major factors which steered to the failure of this corporation were mismanagement of the company's funds, the poor business and accounting procedures and the greed of the top executives. At the time when Jeffrey Skilling was contracted, he came up with the staff of executives who used accounting loopholes, special purpose units and the poor reporting of the financial activities that they took it to their own advantage to hide billions of dollars in debt that came about due to the failure of projects. The Chief Financial Officer at the time; Andrew Fas tow and the other executives of the company did not only mislead company's board of directors and the other audit committee that was dealing with high risk practices in accounting, but they also exerted pressure on Andersen in order to ignore issues which had been identified. This is a major reason that led to bankruptcy of Enron. Types of fundamental accounting and auditing practices which led to fraud at Enron. The complex financial statements which were very confusing to shareholders and the analysts that was being involved. Furthermore, the complex business model and the other unethical practices made the company to use the accounting limitations so as to be able to misrepresent revenues and to carry out modification on balance sheet so as to show the good performance. When Skilling was hired he constantly kept his efforts on the achieving the Wall Street expectations whereby he was advocating for the use of mark to market accounting and kept pressure to the executives of the company to come up with the ways of hiding their debts. Ethical environment that led to fraud at Enron Code of ethics of Enron was basically based on the respect, communication, integrity and the excellence. The culture of this company had much to do with ethics scandal. The company was very harsh and superior organization; they basically laid the emphasis on the competition and financial goals. Enron had hopes that rating system could encourage employees to be able to work hard; this led to opposite where it led to the great harm for the company. The competitive environment and the evaluation standards majorly led to culture of deception. Since the personnel were very nervous that they might lose their jobs, the employees of this company were looking for the means in which the can perform effectively hence they ignored ethical standards and they focused on achieving of financial goals. The competitive environment that greatly led to the lack of presentation of the various errors which led to cheating majorly because the employees acted in a very uncooperative manner with each other. Employees were not required to ask questions because it was seeing as a way of humiliation to the company. The culture of Enron was concerned with the achievement of the financial goals. This is what led to the downfall of the company. Detection of fraud by use of financial statements basically revenues and expenses. The fraud could have been detected using; 1) gross margin test According to Nugent (2003), gross margin is the net sales minus cost of goods sold and test is a crucial determinant of the business success as it measures the operational efficiency. An increasing gross margin or the converging is an indication of the increasing profitability and operational efficiency (Nugent, 2003).A business will always attempt to achieve highest gross profit margin possible. Low profit margins will be indicator to risk. However, the lower profit margins are more credible when turnover is high. Furthermore, Clayton and Ellison, (2011) also averred that the diverging gross margin can also imply fraudulent activity. Applying Gross Margin Test to the Enron's case, is obvious that Enron's gross margin shows decrease of 52% from 1996 to 1997. It was diverging and indicating the operational inefficiencies (Nugent, 2003). There was an increase of about 4% from 1997 to 1998; a decrease of 2% from year 1998 to 1999; no movement from year 1999 to 2000; and a decrease of 1% from year 2000 to 2001. This means that as at 1997, there was a major sign that Enron was really experiencing serious operational inefficiencies. Also, while annual differences from the year 1998 to 2001 were only the minor. The fact that they were fluctuating each year, down the next and so on, indicates that financial statements were being tampered with; in terms of the items not being reported in correct financial period (Nugent, 2003). It is consequently ostensible that using Gross Margin Test, (Nugent, 2003; Clayton & Ellison, 2011; Obiri, 2011) Enron's fraud could have been detected sooner. Gross margin Decrease/increas e 1997 0% -52% 1998 4% 4% 1999 2% 2% 2000 2% 0% 2001 1% -1% 2) Beneish model Wells (2001) wrote about irrational ratios, which have proven to be helpful in detecting the manipulation of the financial statements courtesy of Professor Messod Beneish, accounting lecturer in the Kelly School of Business at Indiana University. In his paper, Wells (2001) mentioned that following the ratios as critical in detecting the financial statement fraud: Days Sales in Receivables, Gross Margin Index, Asset Quality Index, Sales Growth Index and Total Accruals to Total Assets Index. According to the Beneish ratios, the Days Sales Receivables Index should be around 1.465 for manipulators and 1.030 for the non-manipulators. The analysis as at 2000 that there was a possible red flag since the index had exceeded the non-manipulation benchmark. Similarly, there could have been some concern in year 2001 when index reached 1.487. This reflected attempt by Enron to boost the sales revenue by extending the credit terms to its customers; an indication of the operating myopia. In addition, the Gross Margin Index was excessively high in most of the period investigated except in year1998, when it was 0.0168. According to Beneish, the index should be around 1.193 for the manipulators but 1.014 for the non-manipulators. From the analysis, it is very clear that there was gross manipulation of the financial information in 1997, 1999, 2000 and 2001 hence if the adequate and proper investigations were done could have become the apparent much earlier that something was amiss. As public company, Enron wanted to portray good financial performance to the shareholders, and the management knew that as long as the financial results were satisfactory the financial markets would have reacted by keeping the share prices high (Tebogo, 2011). The chances for the earnings manipulation were therefore very high hence the investigators should have been cautious of reported results, and taken the decision to place it under the watch much earlier. Reflecting on performance of Enron in year 1998, when the index was 0.0168, this could have put the management under pressure to show more favorable results in the subsequent years hence the increase seen from year1999 onwards (Tebogo, 2011). According to Beneish Model, Assets Quality Index should be around 1.039 for the nonmanipulators and 1.254 for the manipulators. In all years investigated, the index exceeded the non-manipulation benchmark, which possibly indicated that Enron was capitalizing the costs rather than reporting them as per period expenses (Tebogo, 2011). Enron would have done this in order to be able to improve the reported profits in short term, which is consistent with analysis done for the Days Sales Receivables and Gross Margin indices. Effectively, Enron was hiding costs as non-current assets (Tebogo, 2011). From the data analysis in the Sales Growth index showed the signs of manipulation. According to Beneish, this ratio should range from 1.134 for non-manipulators to 1.607 for manipulators. Between 1997 and 1999 the index was above the non-manipulator benchmark, which should have been a red flag hence, auditors and other investigators should have raised alarm. And, in 2000 the index was at 2.513, a level that was far above the manipulator benchmark. This should have raised suspicion that the company was perhaps reporting phony sales given the astronomical growth in sales revenue. That is, during the period investigated Enron revenues were growing at exponential rates (Tebogo, 2011). An increase in Total Accruals to Total Assets index is a possible indication that management is trying to manipulate earning through a discretionary authority over the accruals policy. The Beneish model indicates that an index of 0.018 is a sign that there is no financial statements manipulation, while anything from 0.031 and above is an indication of tampering with financial data. And, in the case of Enron it was evident that for all the years reviewed, the indices were all above 0.031, a credible sign that Enron was manipulating earnings by exploiting its credit policy. It is therefore worth noting that all the five Beneish indices above show that there was something going on wrong. Therefore using the Beneish Model, the fraud at Enron could have been detected sooner. Index Days sales in receivables index Gross margin index Asset quality index Sales growth index Total accruals to total asset index 1997 0.625 1998 0.148 1999 0.956 2000 1.376 2001 1.487 70.175 0.0168 2.205 1.232 1.401 1.308 1.363 1.314 1.471 1.479 1.526 1.542 1.283 2.513 0.497 0.190 0.187 0.135 0.053 0.048 References McLean, B and Elkin, P, (2004). Smartest Guys in the Room; the Amazing Rise and Scandalous Fall of Enron (2th Edition). Bratton, William W. (May 2002). Does Corporate Law Protect the Interests of Shareholders and Other Stakeholders? Enron and the Dark Side of Shareholder Value; New Orleans: Tulane University Law School. Tebogo, B.(2011).Does the Enron Case Study Provide Valuable Lessons in the Early Detection of Corporate Fraud & Failure. Benston, George J. (November 6, 2003). "The Quality of Corporate Financial Statements and Their Auditors before and After Enron"