Taking a Look at the Enron Scandal

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With the complex system where there were wide ranges of product which include physical assets, it had reached the limits of accounting. The company had taken fully advantage of this to make balance sheet become a perfect picture of company’s performance. They used mark-to-market method of accounting, which state that “once a long-term contract was signed, the present value of the stream of future inflows under the contract was recognized as revenues and the present value of the expected cost of fulfilling the contract were expensed”. (Pauls, 2003) Therefore, the future profit had been account even the real cash flow had not come to the company yet.

Moreover, cause when Enron come to the long term contract, they would assumed that there were long term declines in spot prices (Page 6, journal of economics), there would be the risk of loss if there were the increase in the price of gas in the future and it does not recognize in the financial statement; therefore, to make the income statement made more sense in economics term, Enron had created an accounting structure that help the company to stable their income fluctuation. (ISDA, 2002)

In additional, Enron used special purpose entities to fund or manage risk as well as achieve financial reporting objective (page 11, Paul, 2003). For example, when they wanted to remove a significant investment in their financial statement, they used one of its entities which were joint venture with them to acquire it (Chewco case, ISDA, page
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