January 17, 2011
Enron Corporation was an American energy company that originally specialized in natural gas pipelines then diversified into natural gas trading and became a financial trader in electric power, coal, steel, paper and pulp, water, and broadband fiber optic cable capacity (Healy & Palepu, 2003). By 2001, Enron had become a leading energy company and few questioned its business strategy (Healy & Palepu, 2003).
Financial Accounting Issues
Because Enron’s business model was complex, involving many products, many companies, and many countries, financial accounting of its practice was difficult and general accounting principles did not always apply to its growing business. As a result, Enron was able to manage its income and earnings statements to reveal growth and profit, which is defined as earnings management (Catanach Jr. & Rhoades-Catanach, 2003). Enron had complex ownership and financial structures which also made it difficult to monitor its operations (Catanach Jr. & Rhoades-Catanach, 2003). Because of this complexity, qualitative factors that are used to evaluate finances such as Dupont analysis did not accurately show the financial progress of the company. Additionally, Enron used Special Purpose Entities to fund and manage risks associated with assets by buying joint ventures that were controlled by Enron executives and structuring the transaction so that Enron did not have to show the acquisition as additional debt on the balance statement (Healy & Palepu, 2003). This allowed Enron understate its liabilities and overstate its equity and earnings.
The Fall of Enron
It was not until 2001 that the accounting irregularities of Enron came to light. After it was discovered that several new businesses were not performing well and a series of asset write-downs occurred, Enron’s statements finally showed a large loss (Healy & Palepu, 2003). Additionally... [continues]
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