Taylor
FIN-301
TESC
Module Dustin 7 Discussion Board
Introduction
In 2000, Enron had been named America's Most Innovative Company for the sixth year in a
row by Fortune Magazine. Time Magazine had listed it as one of the 100 Best Companies to Work
For In America ("The enron scandal," 2007) . Enron Corporation went from being the largest energy
trading company in the world to a company filing for bankruptcy in a matter of months. Due to less
than ethical accounting practices and the help of Arthur Andersen, one of the big five accounting
firms, Enron was went bankrupt in 2001. What could happen that fast that would bring such a great
company to its knees?
Mark-to-Market Accounting
What is mark-to-market accounting? It's something that most people have probably never heard
of. Under mark-to-market accounting rules, whenever companies have outstanding energy-related or
other derivative contracts (either assets or liabilities) on their balance sheets at the end of a particular
quarter, they must adjust them to fair market value (Thomas, 2002). Unfortunately, with the
commodities associated with Enron, there was no price to with which to base the future values. Enron
was left to use their own valuation models and come up with future market values. It's pretty easy to
see how this could be a problem. These future gains, ones that were never realized, accounted for
anywhere between one-third and one-half of Enron's profits for 1999 and 2000.
Fraudulent Loans
Enron received loans from Citibank, JP Morgan, along with five other banks totaling nearly
$9.5 billion dollars over nine year period. Instead of recording these loans as liabilities, they were
disguised as prepaid trades of natural gas and other commodities with an LLC based offshore ("7 banks
found," 2002) . If not for the deals with these seven banks, Enron would have showed approximately
$4 billion additional debt and its cash flow would have been half of the $3.2 billion that it the reported.
Knowing real numbers on the financial statements would have kept the stock price down, along
with a downgrade from credit rating agencies ("7 banks found," 2002).
Offshore Entities
Enron had created over 3,000 subsidiaries and partnerships, many of which were registered with
offshore countries. The purpose of these entities was to provide Enron a way to move debt off their
books and hide losses. Eventually, Enron's losses became so huge that it became more and more
difficult to hide them.
Conclusion
Enron failed because of numerous practices that are both unethical, and in many case, illegal.
Mark-to-market accounting, loans disguised as assets, and offshore entities are just a few of the reasons
why the company came crashing down so quickly. Because of cases like Enron , the Sarbanes-Oxley
Act was created in 2002. The Sarbanes-Oxley Act created new standards for corporate accountability
as well as new penalties for acts of wrongdoing. It changes how corporate boards and executives must
interact with each other and with corporate auditors ("Sarbanes-oxley essential information," ). I would
like to think that laws like this would prevent another Enron, but I think it's only a matter of time before
we see something similar happen again. The amount that can be made by circumventing the law will
always have a certain amount of draw. I'd hope I would have done things differently, but who knows?
References
7 banks found to help enron disguise debt. (2002, July 24). Retrieved from
http://www.baltimoresun.com/business/bal-bz.banks24sjul24,0,1845364.story
Sarbanes-oxley essential information. (n.d.). Retrieved from http://www.sox-online.com/basics.html
The Enron scandal . (2007, May 9). Retrieved from
http://www.associatedcontent.com/article/162639/the_enron_scandal.html?cat=17
Thomas, C.W. (2002, April). The rise and fall of enron. Retrieved from
http://www.journalofaccountancy.com/Issues/2002/Apr/TheRiseAndFallOfEnron.htm