Please help me comment and ask questions about this person's Enron response.

I particularly enjoyed reading this case, it was interesting to learn about the loopholes in accounting used by Enron to manipulate its financial statements and overstate their profit. Most of the time looking at this type of case I am always astonished by the voluntary denial or refusal of stakeholders involved to see what is happening.

For each type of ratio/analytical tool, decide if there was an adequate forewarning of Enron's demise.

First looking at the irrational ratios used to detect earnings manipulation,

• The sales growth ratio accounts for 2.51 going from 40 billion in 1999 to over 100 billion in 2000which not only above the non-manipulator meaning index but also almost one point over the manipulators mean index. This ratio here is the main red flag.

Next, one looking at the key ratio for investing we can note a few red flags:

• The debt-to-equity ratio increased from 0.71 to 0.88 from 1999 to 2000 obviously the ratio is a clear indicator of how much debt the company accumulated and constitutes a red flag on the company's capacity to meet its interest payments moreover this ratio was higher than the industry average of 0.50 which is even more signaling.
• The company's current ratio went from 1.073 to 1.0695 fairly below the industry average of 2 signaling the company's incapacity to meet its short-term obligations.
• The return on equity decreased from 1999 to 2000, going from 9.33% just within the industry average to 5.35% which is way below. This result is consistent with
• The return on asset ratio was drastically below the industry average for both years with 2.6% in 1999 and 1.49% in 2000. Just another meaningful red flag.

Finally, looking at the emerging red flag ratio

• The cash flow liquidity ratio here again is a major red flag. The ratio in 2000 at 0.168 is drastically below the industry average, indicating that the company cannot meet its obligations.

In summary, based on the analytical tools and ratios computation it is easy to say that there was an adequate forewarning of Enron's demise, especially from the investing/debt ratios.

Based on your answer to question 1, explain how Enron escaped detection.

I think that different factors enabled Enron to escape detection. One of them is probably the arrogance mentioned in the case of how difficult it was to understand the financial statements of Enron. Their use of mark-to-market investment accounting methods and off-balance sheet financing to hide their debt made it difficult for analysts or regulators to identify the true financial position of the company. The constant dismissal and excuses given when questioned putting everything on confidentiality and no disclosure of meaningful information Also helped hide red flags. Thirdly, auditors allowed Enron to be in control of its financial statements and commit fraud. Lastly, in my opinion, there is also a true lack of willingness to see what was happening or voluntary denial because obviously, a few companies in the case were able to easily put two and two together when considering partnerships with Enron. Ultimately the flags were not hard to see but it is easy to notice that everyone including traders and analysts preferred a perceived performing Enron rather than a true performing company.