Enron Research Paper

3111 Words Dec 5th, 2011 13 Pages
THE COLLAPSE OF ENRON & THE INTRODUCTION OF THE SARBANES OXLEY ACT

BY
TREVOR GARRETT
02/25/2011

Abstract
Enron Corporation was one of the largest energy trading, natural gas and Utilities Company in the world that was based in Huston, Texas. The downfall of Enron is one of the most infamous and shocking events in the financial world, and its reverberations were felt around the globe. Prior to its collapse in 2001, Enron was one of the leading companies in the U.S and considered among top 10 admired corporations and most desired places to work at. Its revenues made up US $139 to $184 billion, assets equaled $62 to $82 billion, and the number of employees reached more than 30,000 people in 20 countries around the world.
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Enron used this loop hole and began to take many assets and liabilities off its balance sheet and into that of SPE’s, so as to be able to access more capital and significantly reduce its risks. It specifically used these SPE’s to borrow funds directly from outside lenders by supplying its own credit and using its high stock prices as guarantees. Enron took full advantage of accounting limitations in managing its earnings and balance sheet to portray a rosy picture of its performance.
The company also violated GAAP in the recording or its revenues and expenses. It committed cut-off fraud by recording revenues early and recording expenses/liabilities after the cut off period thereby violating the policy and principle of revenue recognition. Enron’s trading business adopted mark-to-market accounting which made it difficult to estimate the income and expenses for long term contracts.
Once the financial mis-representations came to light, Enron restated the previous 4 years of financial statements by recording a $1.2 billion reduction in stockholders' equity, adjusting its income statements and balance sheets for the unconsolidated SPEs by $ 569 million, and making prior-period proposed audit adjustments and reclassifications that had originally been considered as immaterial. Following these announcements,

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