Does the Enron Case Study Provide Valuable Lessons in the Early Detection of Corporate Fraud & Failure?

Abstract

The company that came to be known as Enron underwent an extensive transformation in terms of name, and scope of activities. By the time of its collapse, it had a massive number of subsidiaries and was considered one of the most successful companies in the world partly because financial analysts were not paying attention to the very basic financial metrics. The large size and, until 2001, exquisite reputation of Enron appeared to have made financial analysts and other investigators lax and devoid of vigilance when it came to scrutinising its financial performance. However, several financial analysis done after the demise of Enron showed that its collapse could have been predicted much earlier. In this paper, the Beneish ratios, the Modified Altman Z-Score, Chanos Algorithm and the Grove and Cook ratios have all shown that the Enron collapse was predictable, had analysts done what they were supposed to do and not considered the company to be too big to fail. The Enron case study also highlights the importance of qualitative analysis in reviewing corporate performance, which as things turned out was instrumental in drawing the public’s attention to the company’s dubious accounting practices.