Mark-To Market Accounting For Enron

When the President of Enron, Kenneth Lay, hires new CEO Jeffrey Skilling, a very energetic and a “dreamer” who joins Enron on the condition that they utilize mark-to-market accounting, allowing the company to book potential profits on certain projects immediately after the deals are signed. To keep its stock price going up par example Enron began a venture that might make $50 million 10 years from now, it could claim the $50 million as current income. However, this projects turn out to be successful. This gives Enron the ability to subjectively give the appearance of being a profitable company even if it isn't.

After Enron’s fatal losses, the company began to deteriorate rapidly. The CEO at the time, Jeffrey Skilling, attempted to save the company by hiding its financial losses through the use of market-to-market accounting. This particular accounting technique is characterized by recording prices of assets to resemble their current market value rather than the book value, net asset value. For example, Enron would build an asset and claim the projected profit (current market value) even though the asset had not yet produced any such profits. If the earnings of the asset were less than the claimed current market value that was projected, the company

Enron was an energy trading and communications company located in Houston, Texas. During 1996-2001 Enron was given the name of America’s Most Innovative Company by Fortune magazine as it was the seventh-largest corporation in the US. The problem that led this company to bankruptcy was due to the fact that fraudulent accounting practices took place allowing Enron to overstate their earnings and tuck away their high debt liabilities in order to have a more appealing balance sheet (Forbes.com, 2002). Enron’s accounting team “cooked” the books to every meaning of the word so that their investors would not see anything wrong with the failing organization. This poorly structured company led people to jail time, unemployment, and caused retirement stocks to be dried up. Enron had a social responsibility to its stockholders and rather than being up front and honest about the failing company they hid every financial flaw in order to keep receiving money from its investors. By Enron not keeping a social

A question asked by Bethany McLean, a reporter for Fortune Magazine, in 2001 was “how does Enron make its money?” (Mclean) This, a quite straightforward question, was something that the executives refused to answer, citing confidentiality. Jeffery Skilling agreed to join Enron as CEO on the condition that the use of use mark-to-marketing (MTM) accounting would be allowed. Arthur Andersen, the companies accounting firm, and the SEC signed off on it, and Skilling joined the company in 1990 (Enron: The Smartest Guys in the Room). This type of accounting values an asset based on its current market

In the summer of 2001, questions began to arise about the integrity of Houston energy company Enron’s financial statements. In December, they filed for bankruptcy as their fraud came to light and the United States government froze all of their assets and began prosecuting their executives and their external auditing firm Arthur Anderson (Franzel 2014). Enron was not the only company using accounting loopholes to mislead stockholders though; Global Crossing, Tyco, Aldephia, WorldCom, and Waste Management all underwent investigation for similar

This event was unprecedented. The seventh largest company in the United States disintegrated from an annually profitable company in business for over sixteen years to a company claiming to be bankrupt over a period of a few months (O’Leary). Ultimately, fraudulent accounting and misstatements of revenues and debt obligations orchestrated by the CEO, CFO, and other senior managers were to blame. These revelations roiled stakeholder trust in public companies' financial reporting, accounting methodology, and overall transparency. In addition to Enron’s admissions, their accountant and auditor, Arthur Andersen LLP, was determined to have conspired to assist in the inflation of stated profits mainly by not disclosing Enron's money-losing partnerships in the financial statements (PBS). Arthur Andersen eventually surrendered the practices’ CPA licenses in the United States after being found guilty of criminal charges relating to the firm's handling of auditing for Enron

In 2001, Enron, the largest energy company in the U.S., collapsed after a vast creative-accounting scandal. Enron practiced a type of accounting called mark-to-market practice which it used to hide losses. Mark-to-market accounting it not illegal on its own but it was used improperly by Enron. The CFO and CEO of Enron were able to write off any losses to an off-the-book balance sheet and made the company appear financially healthy (Seabury, 2008). Investors lost $74 billion while thousands of employees lost their jobs and

It was 13 years ago that the announcement of bankruptcy by Enron Corporation, an American energy, commodities and service firm at the time, would unravel a scandal resulting in what is regarded as the most multifaceted white-collar crime FBI investigation conducted in history. High-ranking officials at the Houston-based company swindled investors and managed to further their own wealth through intricate, shifty accounting practices such as listing assets above their true value to increase cash inflows and earnings statements. This had the effect of making the company and its shares look more enticing than they really were to potential investors. Upon their declaration of negative net worth in December 2001, shareholders filed a $40 billion lawsuit against the company, citing a drop of shares from around $90 per share to around $1 per share within only a few months. In light of these events, officials at the Securities and Exchange Commission (SCE) were prompted to initiate further investigation to figure out how such a drastic loss occurred.

The focus of the corporation soon changed direction once it was realized that investing in selling intangible assets on the market could provide easier and higher revenue returns. This type of trading on the open stock market, with little regulations is what allowed the infamous criminal acts to take place and led to one of the world’s worst bankruptcy cases in United States history. An investigation finally occurred when investors found suspicious stock prices increasing exponentially and a whistleblower raised concern that finally revealed the fraudulent operations of Enron’s top executives conspiring with multiple businesses.

Enron was a publicly traded energy company formed in 1985 by Kenneth Lay when Internorth acquired Houston Natural Gas; the company, based in Houston Texas, Enron (originally entitled “EnterOn”, but was later subjected to abbreviation), worked specifically in power, natural gas, and paper and even ventured into various non-energy-based fields as they expanded, including: Internet bandwidth, risk management, and weather derivatives. Several years after the founding of the company, Enron hired a man by the name of Jeffrey Skilling, a former chemical and energy consultant, who, upon promotion, created a team of high-level administrative employees who, by using special purpose entities, lackluster reporting of finances, and unethical accounting practices, hid billions of dollars of debt from unsuccessful arrangements and ventures from stock holders and the U.S. Securities and Exchange Commission. Enron executives achieved this scheme by using a controversial accounting method entitled “mark-to-market accounting,” which in essence, assigns value to financial commodities based on their projected market values; mark-to-market accounting is the opposite of cost-based accounting which records the price of a commodity at the purchase price. As a result of this new method, Enron’s worth skyrocketed to over $70 billion at one time, only to collapse miserably several years later—ultimately costing thousands upon thousands of people their jobs, pensions, and retirements. Enron’s employees

Enron Corporation was an American energy trading company who committed the largest audit fraud alongside Arthur Andersen and filed for one of the largest bankruptcies in history in 2001 after producing false numbers and committing fraud for years (“Enron’s Questionable Transactions” page 93). Enron failed to run an ethical business in multiple aspects. The executives of the company abused their powers by having board members not properly oversee its employees. Enron committed accounting malpractice by producing false financial reports to hide the debt from failed projects and deals. Using a mark-to-market accounting method, Enron would create assets and claim the projected profit for the books immediately even if the company had not made any profit yet. In order to hide its failures, rather than reporting their loss, they would transfer the loss to an off-the-books account, ultimately leading the loss to go unreported. Along with Enron hiding losses and creating false profit for the

Even the small profits reported by Enron in 2000 were eventually determined to be only a illusion by court-appointed bankruptcy examiner Neal Batson. Batson’s report reveals that over 95% of the reported profits in these two years were attributed to Enron’s misuse of MTM and other accounting techniques. But while financial analysts could not be expected to know that the company illegally manipulated the earnings, the reported profit margins in 2000 were so low and were declining so steadily that they should have merited ample skepticism from analysts about the company’s profits.

As competition increased and the economy started to plunge in the early 2000s, Enron struggled to maintain their profit margins. Executives determined that in order to keep their debt ratio low, they would need to transfer debt from their balance sheet. “Reducing hard assets while earning increasing paper profits served to increase Enron’s return on assets (ROA) and reduce its debt-to-total-assets ratio, making the company more attractive to credit rating agencies and investors” (Thomas, 2002). Executives developed Structured Financing and Special Purpose Entities (SPE), which they used to transfer the majority of Enron’s debt to the SPEs. Enron also failed to appropriately disclose information regarding the related party transactions in the notes to the financial statements.Andersen performed audit work for Enron and rendered an unqualified opinion of their financial statements while this activity occurred. The seriousness and amount of misstatement has led some to believe that Andersen must have known what was going on inside Enron, but decided to overlook it. Assets and equities were overstated by over $1.2 billion, which can clearly be considered a material amount (Cunningham & Harris, 2006). These are a few of several practices that spiraled out of control in an effort to meet forecasted quarterly earnings. As competition grew against the energy giant and their

The story of Enron begins in 1985, with the merger of two pipeline companies, orchestrated by a man named Kenneth L. Lay (1). In its 15 years of existence, Enron expanded its operations to provide products and services in the areas of electricity, natural gas as well as communications (9). Through its diversification, Enron would become known as a corporate America darling (9) and Fortune Magazine’s most innovative company for 5 years in a row (10). They reported extraordinary profits in a short amount of time. For example, in 1998 Enron shares were valued at a little over $20, while in mid-2000, those same shares were valued at just over $90 (10), the all-time high during the company’s existence (9).

The case of Enron Corporation and Andersen, LLP can be noted as one of the most infamous fraud scandals in US history. Investors lost millions of dollars and ruined the public’s trust. Enron was once the seventh largest public company in the United States and Andersen LLP was the world’s largest and most respected business organizations. Enron’s stock prices soared to approximately $100 to less than $10 in 2001. How did these two big giants fall into oblivion and what could have been done to avoid the disaster of these companies?