United International University

Term Paper on: Financial Performance Evaluation of Square Textile Ltd.

Submitted to:
Muhammad Enamul Haque Assistant Professor School of Business and Economics United International University Course Instructor: FIN 3123

Submitted by:

Sl Number 1. 2. 3. 4. 5.

Name Md. Marufur Rahman Samira Rahman Md. Shoeb Mahmud Razia Sultana Brishty Ashfaque Hossain

ID 114101002 114101003 111101082 111101099 111101285

Date of Submission: 22nd December, 2012

Letter of Transmittal:

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Table of Content:

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Executive Summary:

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1.0 Introduction:
This report is prepared with an intention to meet partial requirement of the course Management Audit and Auditing Standards and to have a better insight of the subject matter which is Enron Case: Failure & Liability of Auditors. To do that, we have read different articles and journals on the topic. We have tried to accommodate our knowledge from classroom lectures with the subject matter.

2.0 Objective:
The main objective of this report is to understand the liability and responsibility of an auditor to a maximum extent. The Enron Scandal is one the buzzing event of the decade, relating to the failure of one of the biggest Audit Firms of the world that caused them to surrender their license to practice. As an accounting student, it is a lesson on professionalism of an auditor. Hence, understanding the responsibility of an auditor is the prime objective of this report.

3.0 Methodology:
As it is said earlier, while preparing this report, different journals and articles were reviewed, to get the better insight on the topic. In addition, knowledge gathered from class lectures and course materials were combined with in it. Moreover, the structure of this report is such that first basic ideas are conveyed along with related topics; such as description of Enron Corporation; Arthur Anderson, which is the auditing firm found guilty; The key personnel responsible for this scandal and the ways by which the scandal was perpetrated. Then the facts and consequences of this scandal are explained segregating them among investors, management of Enron Corporation and the related parties. Finally, our findings from the study are elaborated, focusing on the topic which is responsibility, liability and professional behavior of an auditor.

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4.0 Basic Information:

4.1 Enron Corporation:
Enron Corporation was an American Energy, Commodities, and Services Company based in Houston, Texas. Before its bankruptcy on December 2, 2001, Enron was one of the world's major electricity, natural gas, communications, and pulp and paper companies, with claimed revenues of nearly $101 billion during 2000. Fortune named Enron "America's Most Innovative Company" for six consecutive years. At the end of 2001, it was revealed that its reported financial condition was sustained substantially by an institutionalized, systematic, and creatively planned accounting fraud, known since as the Enron scandal. Enron has since become a well-known example of willful corporate fraud and corruption. The scandal also brought into questions the accounting practices and activities of many corporations in the United States and was a factor in the creation of the SarbanesOxley Act of 2002. The scandal also affected the greater business world by causing the dissolution of the Arthur Andersen accounting company.

4.2 Arthur Anderson:

Arthur Andersen LLP, based in Chicago, is a holding company and formerly one of the "Big Five" accounting firms among PricewaterhouseCoopers, Deloitte Touch Tohmatsu, Ernst & Young and KPMG, providing auditing, tax, and consulting services to large corporations. In 2002, the firm voluntarily surrendered its licenses to practice as Certified Public Accountants in the United States after being found guilty of criminal charges relating to the firm's handling of the auditing of Enron, an energy corporation based in Texas, which had filed for bankruptcy in 2001 and later failed. The other national accounting and consulting firms bought most of the practices of Arthur Andersen. The verdict was subsequently overturned by the Supreme Court of the United States. However, the damage to its reputation has prevented it from returning as a viable business, though it still nominally exists.

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4.3 Key Management Personnel Involved:

4.3.1 Kenneth Lay: Kenneth Lee "Ken" Lay was an American businessman. He played a leading role in the corruption scandal that led to the downfall of Enron Corporation. Lay and Enron became synonymous with corporate abuse and accounting fraud when the scandal broke in 2001. Lay was the chairman of Enron from 1985 until his resignation on January 23, 2002.

4.3.2 Jeffrey Skilling: Jeffrey Keith "Jeff" Skilling is the former CEO of the Enron Corporation, headquartered in Houston, Texas. In 2006 he was convicted of multiple federal felony charges relating to Enron's financial collapse, and is currently serving 14 years of a 24-year, four-month prison sentence at the Federal Correctional Institution (FCI) Englewood in Littleton, Colorado.

4.3.3 Andrew Fastow:

Andrew Stuart Fastow is an American businessman who served as the chief financial officer of Enron Corporation, an energy trading company based in Houston, Texas, until the U.S. Securities and Exchange Commission opened an investigation into his and the company's conduct in 2001. Fastow was one of the key figures behind the complex web of off-balance-sheet special purpose entities (limited partnerships which Enron controlled) used to conceal their massive losses.

4.3.4 Richard Causey: Richard Alan Causey is one of the prominent figures in the Enron accounting scandal. Causey was Enron's Executive Vice President and Chief Accounting Officer. Causey graduated from the University of Texas at Austin with a bachelor's degree in accounting and an MBA. He then became a certified public accountant in the state of Texas. He obtained a job at Arthur Andersen, where he rose within the ranks and eventually became the head of the Enron audit team.

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5.0 Causes of Downfall:

Enron's complex financial statements were confusing to shareholders and analysts. In addition, its complex business model and unethical practices required that the company use accounting limitations to misrepresent earnings and modify the balance sheet to indicate favorable performance. The combination of these issues later resulted in the bankruptcy of the company, and the majority of them were perpetuated by the indirect knowledge or direct actions of Lay, Jeffrey Skilling, Andrew Fastow, and other executives. Lay served as the chairman of the company in its last few years, and approved of the actions of Skilling and Fastow although he did not always inquire about the details. Skilling constantly focused on meeting Wall Street expectations, advocated the use of mark-to-market accounting (accounting based on market value, which was then inflated) and pressured Enron executives to find new ways to hide its debt. Fastow and other executives created off-balance-sheet vehicles, complex financing structures, and deals so bewildering that few people could understand them.

1) http://en.wikipedia.org/wiki/Enron_scandal#Rise_of_Enron 2) http://en.wikipedia.org/wiki/Accounting_scandals 3) http://en.wikipedia.org/wiki/Enron 4)

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