Enron

Enron

1. Explain at least four accounting improprieties that occurred in Enron

Accounting standards required that third parties own at least 3 percent of the assets in SPEs. This rule was violated. Enron also represented that the SPEs helped it to hedge downside risk. This turned out not to be the case, because the SPEs used Enron's stock and financial guarantees to carry out the hedges. While Arthur Andersen, Enron's outside auditor, initially raised objections, the accounting firm ultimately softened its position. Andrew Fastow, Enron's former CFO, became a partner in several SPEs and profited personally, which poses serious questions as to whether he breached his fiduciary duty to Enron stockholders. In late 2001, Enron was forced to restate its financials for 1997 through 2000 after consolidating the SPEs, resulting in a decline in earnings of approximately $600 million and an increase in debt of approximately the same amount. Equity fell by $1.2 billion (see Healy and Palepu 2003 for a fuller description).

A second procedure Enron used was mark-to-market accounting, in which a firm that signs a long-term contract can, under certain circumstances, recognize as current revenue the present value of the expected stream of future inflows and expense the present value of expected future costs. While such a process is appropriate in some situations, Enron used mark-to-market accounting to book future revenues as current revenue even when serious questions existed as to whether the long-term revenues would in fact materialize.

As the price of Enron stock declined, some Enron executives exercised their stock options and sold their shares, in some cases out of public view through loan repayment plans, while at the same time encouraging employees to hold and even to buy the stock. Many employees who tried to sell the stock in their 401(k) plans were barred from doing so and lost not only their jobs but most or all of the asset value of their retirement plans.

2. Explain how the Enron Company hides their accounting improprieties

Enron's financial statements but also provided lucrative consulting services to its client; the potential for conflicts of interest is obvious. A variety of proposals have been offered--and some implemented through congressional action--to deal with these issues. Among these are proposals prohibiting accounting firms that provide outside auditing services from also providing many types of consulting services to the same clients, proposals requiring more oversight of public accounting firms, proposals requiring CEOs to certify financial statements, and proposals requiring more independence in corporate boards and strengthening of audit committees.

3. Discuss who perpetrated the scandal both inside and outside the company

The financial downfall of Enron had many officials in Washington and the financial community questioning how sensible is was for employees to invest their 401(k) in the company stock. While the plans are arguably well intentioned, critics say it violates a key rule of responsible investing: Diversity. In both the House and the Senate, Democratic legislators are pushing for a law barring workers from investing more than 10 percent of retirement contributions in their own company's ...