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2.1 Accounting Fraud:
Mark-to-market technique:
This technique of accounting introduced by Skilling (Giroux, 2008) revealed Enron successful in escaping losses which were associated with volatile prices of gas and inaccurate predictions. In this way, Enron valued long-term trading contracts at market value instead of the traditional historical cost. Mark-to-market is an accounting technique applied where developed markets for financial instruments exist and where there are obvious closing prices (Giroux, 2008). Essentially the profit is determined from the actual contracts. While it is clear that the market for gas was not obvious, Giroux (2008) notes that Enron went on to use it; Enron recorded big gains before even any gas sales were made. There is no doubt that the projection of the long-term income is overly optimistic and inflated.

SPE—Special Purpose Entity:

Enron also used SPEs and structured financing to conceal their debts off the book and camouflage their existing debts. The officers manipulated the financial analysts to rate the company as ‘the strong buy’. With the SPEs and structured financing, Enron was successful to hide losses even when it ventured into other markets which were in reality recording losses. This attracted huge public investment. As Enron revealed in October 2001, they violated accounting standards that require at least 3 percent of assets to be owned by independent equity investors. By ignoring this requirement, Enron was able to avoid consolidating these special purpose entities. As a result, Enron’s balance sheet understated its liabilities and overstated its equity and its earnings. In addition to the accounting failures, Enron provided only minimal disclosure on its relations with the special purpose entities. The company represented to investors that it had hedged downside risk in its own illiquid investments through transactions with special purpose entities.

2.1 Truthfulness
The lack of truthfulness by...
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