FINANCIAL STATEMENTS. CAN WE TRUST THEM

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FINANCIAL STATEMENTS.CAN WE TRUST THEM?

• MBUS624 Finance Theory and Practice
• CASE PRESENTATION by
• Brian Belsby
• John Dieckman
• Mike Dvolz
• Penjor Ngudup
• Chao (Jerry) Qin

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The Three Rs of Financial Reporting

• Relevance
• Sufficient and appropriate information so that
  investors evaluate past performance and predict
  future performance.
• Reliability
• Accurately represent economic conditions or
  events.
• Representational Faithfulness
• Ability of financial statements to reflect the
  real economics of the transaction being reported

3
Additional Characteristics of Good Financial
Reporting

• Comparable
• with similar information about other companies
  and with similar information about the same
  company for some other time period
• Consistent
• application of accounting standards to similar
  transactions.
• Complete
• enough to enable investors to understand past
  events and predict future performance
• Clear
• enough to promote the understanding of a
  reasonable person.

4
ENRON

• The Rising Star of the early 90s
• Intricate web of over 3000 partnerships
• Special Purpose Entities (SPE) and partnerships
• Braveheart, Raptors, Chewco, LJMS etc.

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THE SPE GAME PLAN
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OPERATION BRAVEHEART
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UNAUDITED SUMMARY OF LJMs TRANSACTIONS
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ENRON CORP.Restatement of Net Income in Millions
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Net Income 1997-2000
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Debt 1997-2000
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Equity 1997-2000
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Why Enron went bankrupt?

• Assets in, Earnings Out
• Better financial performance
• Parking Space for Debt
• Loans from financial market at low cost
• Meet the financing needs
• Financial Hit
• Cant get loans any more
• Forced to reduce equity
• Collapse

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ENRON PARTNERSPOLITICAL CLOUT

• Citigroup misrepresented its 1 Billion loan to
  help hide Enrons true financial position.
• Citigroups Robert Rubins infamous call to
  Undersecretary of Domestic Finance Peter Fisher
  to hold off credit agencies in order to buy time.
• Rubin never made to testify in Senate
  Investigation.

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POLITICAL CONTRIBUTIONS
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RECOMMENDATIONS

• Reduce incentive for Senior Executive Stock Price
  Inflation
• Require six months holding period after leaving
  company before
• exercising mature options.
• Auditing and Consulting Services cannot be held
  by the same Company
• Conflict of interest between auditing services
  and consulting
• services.
• CEO, CFO accountability of accounting statement
  accuracy
• Formal CEO, CFO statement signoff.
• Specific legal requirements for attaching
  liability for accuracy of
• statements.

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CONCLUSION

• Generally financial statements reflect the true
  financial position of a company.
• However, various accounting practices can be
  executed to tailor a companys financial
  statements.
• More government scrutiny can tighter legal
  requirements required to protect the general
  public from deception.