Question

Topic -ACCOUNTING AND ACCOUNTABILITY of THE FALL OF ENRON

Requirement:

1.      How did the fall of the Enron case affect the accounting and accountability of corporations in the US?

2.      Enron switches from traditional methods to more technological base methods, prove to be “efficient” for the organizations?

3.      Market to Market accounting method 

4.      Special Purpose Entities (SPE) transforms the organizations success on the balance sheet 

Answer 1

1)  How did the fall of the Enron case affect the accounting and accountability of corporations in the US -

The story of Enron Corporation depicts a company that reached dramatic heights only to face a dizzying fall. The fated company's collapse affected thousands of employees and shook Wall Street to its core. At Enron's peak, its shares were worth $90.75; when the firm declared bankruptcy on December 2, 2001, they were trading at $0.26. To this day, many wonder how such a powerful business, at the time one of the largest companies in the United States, disintegrated almost overnight. Also difficult to fathom is how its leadership managed to fool regulators for so long with fake holdings and off-the-books accounting

At the time, Enron's collapse was the biggest corporate bankruptcy to ever hit the financial world (since then, the failures of WorldCom, Lehman Brothers, and Washington Mutual have surpassed it). The Enron scandal drew attention to accounting and corporate fraud as its shareholders lost $74 billion in the four years leading up to its bankruptcy, and its employees lost billions in pension benefits.

Increased regulation and oversight have been enacted to help prevent corporate scandals of Enron's magnitude. However, some companies are still reeling from the damage caused by Enron. Most recently, in March 2017, a judge granted a Toronto-based investment firm the right to sue former Enron CEO Jeffrey Skilling, Credit Suisse Group AG, Deutsche Bank AG, and Bank of America's Merrill Lynch unit over losses incurred by purchasing Enron shares.

2) Market to Market accounting method -

One of Skilling's early contributions was to transition Enron's accounting from a traditional historical cost accounting method to mark-to-market (MTM) accounting method, for which the company received official SEC approval in 1992. MTM is a measure of the fair value of accounts that can change over time, such as assets and liabilities. Mark-to-market aims to provide a realistic appraisal of an institution's or company's current financial situation, and it is a legitimate and widely used practice. However, in some cases, the method can be manipulated, since MTM is not based on "actual" cost but on "fair value," which is harder to pin down. Some believe MTM was the beginning of the end for Enron as it essentially permitted the organization to log estimated profits as actual profits.

3) SPE

How the SPV Works

The financials of an SPV may not appear on the parent company's balance sheet as equity or debt. Instead, its assets, liabilities, and equity will be recorded only on its own balance sheet.

(Ai should always check the financials of any SPV before investing in a company. Remember Enron! )

Thus, the SPV may mask crucial information from investors, who are not getting a full view of a company’s financial situation. Investors need to analyze the balance sheet of the parent company and the SPV before deciding whether to invest in a business.