The Collapse of Enron Seemed to Be a Thumb in the Nose to the Efficient Markets Hypothesis and Agency Theory. Discuss.

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The collapse of Enron was entirely related to the accounting practices adopted by the company. It is a number of these questionable, and in some cases straight out fraudulent, accounting practices that pertained to the most dramatic collapse of a major company in years. An analysis of some of these accounting practices brings to light the problems with the use of concepts such as mark-to-market accounting and the use of special purpose entity’s (SPE’s). To say that the collapse “seemed to be a thumb in the nose of the efficient market hypothesis (EMH)” is a statement misguided in the understanding of this concept. One can explain this through the fact that a number of the basic principals of the EMH were satisfied during the time of the…show more content…
The balance sheet of Enron included a number of current and noncurrent accounts called “Price risk management assets” (Haldeman, 2006), these accounts were the fair value accounts that related to Enron’s assets. “In January 1992 Skilling and Enron persuaded the SEC to allow them to use mark-to-market accounting to value there long term gas contracts and derivatives” (Haldeman, 2006) this gave Enron the “Potential to book future profits on the day the deal was signed” (Enron: The Smartest Guys in The Room) and in turn allowed “Enron’s profits to be what ever they said they were” (Enron: The Smartest Guys in The Room). An example of the use of these “fair” value accounting methods is Enron’s building of a power plant in India. India could not pay for the energy that Enron produced which led to a loss of 1 billion dollars, however multi-million dollar bonuses were paid to executives based on “imaginary profits” developed from the fair-value accounting approach (Enron: The Smartest Guys in The Room). From the evidence above, we can see that the information that was produced from mark-to-market accounting did not allow for the true and fair view of the companies performance. The application of the efficient market hypothesis flows onward from the

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