University of Technology, Jamaica
School of Business Administration
The Smartest Guys in the Room
Tutor: Ms S. Bewry
Student: Rajik Brown
1. To identify least five (5) control issues in the movie using the C.R.I.M.E. abbreviation from the Committee of Sponsoring Organisation of the Treadway Commission (COSO) framework was used.
C- Control Activities are procedures and policies that aid management and employees in carrying directives and provide the presence of strong internal controls. ENRON possessed poor controls.
* All transactions of a firm must be properly authorised meaning they must exist or occur e.g.
* There ...view middle of the document...
Financial data was also shredded.
M-Monitoring is a process that assesses the quality of the system's performance over time through ongoing evaluations. In ENRON, there was no monitoring as many fraudulent transactions, false records and unanswered questions that slipped by persons in the institution. Persons were blinded by attractive stock price opportunities and incentives received by management.
E- Control Environment also referred to as ‘tone at the top’ influences the control consciousness of its people through factors such as integrity, ethical values, management philosophy etc. Unethical and fraudulent practices occurred at the highest form of management (Ken Lay and Skilling) and those practices impacted the actions of the rest of the employees e.g. the Traders stole money from persons who had to pay increased utility bills due to intentional and planned powercuts.
2. How did Enron engage in fraudulent financial in reporting? Give at least three examples of Enron’s creative accounting policies.
Firstly, ENRON established off shore businesses, industries and accounts to aid in hiding the company’s losses and boost it’s profitability by making money. These offshore entities e.g. Lebanon, with Mr M. Yass helped to portray that ENRON was making billions when in fact losses were made. This illusion of profit increased the stock price thus allowing more and more investors to purchase stock.
Secondly, management created a mark to market accounting strategy where management entered into future contracts that wouldn’t yield money until in the future but yet transactions and profits were recorded immediately in the current period to make the business appear profitable. Skilling referred to this as Hypothetical Future Value Accounting (HFVA).The profits were open to manipulation. Arthur Anderson, a chief accountant even approved this strategy. A number of financial records have also been shredded.
Thirdly, Andrew Fastow created an entity for himself the laundered $45M+. The entity, LJM would allow bankers to invest into a fund that would purchase assets from Enron. A scheme by Enron and Merryll Lynch occurred where the ‘books were cooked’. Merryll pretended to purchase an existing Enron asset when it was really engaged in a loan.
3. Explain Ken Lays relationship with President Bush. What is your opinion of the regulatory environment which existed at the time.
Ken Lays and President Bush apparently had a very close relationship as ENRON, Ken Lay’s organization was accused of contributing to President Bush’s election campaign as well as President Bush referring to Ken Lay as ‘Kenny Boy’, a name only used by his wife. I believe that President Bush and Ken Lay formed a secret alliance to benefit from each other. Gray Davis, former governor was going to run for President. I believe that President Bush had signed a state law to deregulate the electricity market in 1999...