Enron's Accounting Fraud

1304 Words Feb 14th, 2012 6 Pages
Financial Accounting

Assignment : ENRON’s Accounting Fraud

MBA (2011-2013)

1/3/2012
Submitted To: M Jameel
Submitted By: Maliha Aziz Butt

ENRON’s ACCOUNTING SCANDAL

INTRODUCTION:
Northern Natural Gas Company (the ancestor of ENRON) was established in 1930. In 1979, Inter North Inc. bought Northern Natural Gas Company and placed it under a new management. In the 1980s, the United States Congress passed legislation deregulating the sale of natural gas. At the beginning of the 1990s, Congress passed a similar legislation targeted at the sales of electricity. These steps launched a new era in the energy market, allowing companies like ENRON to prosper. In 1985, Kenneth Lay, CEO of Houston Natural Gas devised a new company
…show more content…
For instance, unrealized gains accounted for a little more than of ENRON’s $1.1 billion reported income before taxes for 2000. The use of this accounting measure, as well as the use of other questionable measures, made it difficult for the public to see the business model of ENRON. In fact, the numbers were recorded on the books but the company was not paying equivalent taxes.

Creating off Balance Sheet Entities to Cover-up losses:
Moreover, we know that ENRON has been buying a big number of ventures that looked promising. We know that ENRON has also been creating off balance sheet entities in order to remove the risk of their financial statements. Because of market-based accounting explained above, ENRON recorded all time high revenues. The company thus wanted to be involved in other areas. For instance, ENRON was buying or developing an asset – such as a pipeline – and then was expanding through a vertical integration (buying a retail business around that pipeline). This strategy required huge amounts of initial investments and was not going to generate earning or cash flow in the short term. If ENRON elected to present this strategy on its financial statements, it would have placed a big burden on the company’s ratios and credit ratings, and credit ratings investment grade was crucial for ENRON energy trading business. In order to find a solution to this issue, ENRON decided to look for outside investors who would like to make those deals with

More about Enron's Accounting Fraud

Open Document