Enron case

Topics: Auditing, Internal control, Audit Pages: 28 (8735 words) Published: September 20, 2013
 1. Adsteam Adonist@gmx.de, quigonjinn@hotmail.de was a very model of conglomerate(jujie). In the eyes of the outside, it was a successful company. But it's not true. It’s far from other companies in its complex structure. Adsteam group comprised numerous less-than-majority-owned companies. It acquired major share-holdings in numerous companies throughout the 1980's. The acquisition strategy resulted in an extremely complicated cross-shareholding-based structure. It was noting that the maximum amount of shareholdings of any company in other group entities was all kept below 50 per cent. For example, more than 90% of Tooth & Co Ltd was owned by the group, but the big shareholding were split into three parts each of which is under 50%. In this way, Tooth was consolidated by none of them. It could be said that Splavins, the head of the company, was intentionally to do that in that he could utilize the Accounting Standards, according to which, only parent holding more than 50 per cent of its subsidiaries should make both consolidated and separated financial statement. In fact, although the percentage owed by Adsteam was under 50%, Spalvins was totally in charge of its associated companies by controlling their management human resources. At the same time, Adsteam tried to mask its financial structure and made them more like financially independent companies. A trend was that these group companies penetrated each other further. Why did they do that? The reason was that this kind of complicated structure could give great influences on themselves in several ways. There are three major influences on its accounting and commerce exerted by the company’s complex structure. The first was on balance sheet. While Adsteam owned only less-majority shares of its associates, it did not need to consolidate these associates into it balance sheet according to the Australia Accounting Standard. Thus the balance sheet of Adsteam was much better than it actually was. Table 1 is the “consolidated” Adsteam group which strips out the impact of crossholding calculated by Australia Ratings. Table 1 (million $)

From the diagram above it can be found that in the consolidated balance sheet of Adsteam group, its debt was much higher than its free equity. The gearing of Adsteam group was about 2.7 while as a solely company Adsteam’s gearing was only 1.38. Why the rate differentiated so much when consolidating its associate into its accounts. It can be recognized by analyzing a presumption in such a method. Without considering Adsteam group’s finance activity, the Tooth only showed total assets of $707 million, funded by external liabilities of $527 million and shareholder’s funds of 180 million. Now Adsteam group financed $393 million into the Tooth and effectively controlled the company. Then it asked the Tooth to invest the $393 million into other Adsteam group’s associates. Both to the Tooth and the Adsteam group no cash or profit was created in this finance activity. But the two companies’ assets and free equities increased significantly which led to a lower gearing rate than it actual was. By owning only less-majority shares of its associates, Adsteam group did not need to consolidate its associates into its balance sheet and increased its total asset and free equity rapidly in the 1980’s. Another effect is on Profit and Loss account. In fact, a large proportion of recorded earnings was related to one-off share trading profits. The cash flow from core business was far less than from associates’ dividends and other business activities. In 1988 only $32 million cash flow came from core activities while investment contributed $48 million cash flow and other $75 million cash flow from the sale of an interest of Tooth. It can be said that Adsteam's great growth in Profit and Loss was achieved by...
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