Enron is one the enduring legacies of corporate fraud in thelast 10 ye

QUESTION

Enron is one the enduring legacies of corporate fraud in thelast 10 years. It erupted due to the incompentencies ofCalifornia in failing to truly deregulate electricitygeneration.What techniques did the wizards at Enron use to inflate earningsand their stock price? How did they manipulate cash
Jeffrey Skilling was hired as the president, he developed a staffof executives that, through the use of accounting loopholes,special purpose entities, and poor financial reporting, were ableto hide billions in debt from failed deals and projects. ChiefFinancial Officer Andrew Fastow and other executives were able tomislead Enrons board of directors and audit committee of high-riskaccounting issues as well as pressure Andersen to ignore theissues. The primary motivations for Enrons accounting andfinancial transactions seem to have been to keep reported incomeand reported cash flow up, asset values inflated, and liabilitiesoff the books. There are 6 accounting issues that are important:(1) The accounting policy of not consolidating SPEs thatappear to have permitted Enron to hide losses and debt frominvestors. (2) The accounting treatment of sales of Enronsmerchant investments to unconsolidated (though actually controlled)SPEs as if these were arms length transactions. (3) Enrons incomerecognition practice of recording as current income fees forservices

rendered in future periods and recording revenue fromsales of forward contracts, which were, in effect, disguised loans.(4) Fair-value accounting resulting in restatements of merchantinvestments that were not based on trustworthy numbers. (5) Enronsaccounting for its stock that was issued to and held by SPEs. (6)Inadequate disclosure of related party transactions and conflictsof interest, and their costs to stockholders.Enron also posted future earnings as current earnings. Forexample a company was paying going to pay ENRON 10 million dollarsover 12 months starting on December. Enron would then post that ascurrent earnings saying that the company paid 10 million dollarsupfront instead of over 12 months.

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