Accounting Theory

Topics: Enron, Enron scandal, Arthur Andersen Pages: 14 (4944 words) Published: December 25, 2012
Enron background
Enron Corporation was an American energy, commodities, and Services Company based in Houston, Texas. Enron employed approximately 20,000 staff and was one of the world's major electricity, natural gas, communications, and pulp and paper companies, with claimed revenues of nearly $101 billion during 2000. Fortune named Enron "America's Most Innovative Company" for six consecutive years. The event that take place by the company

At the end of 2001, it was revealed that it’s reported financial condition was sustained substantially by an institutionalized, systematic, and creatively planned accounting fraud, known since as the Enron scandal. Enron has since become a well-known example of willful corporate fraud and corruption. The scandals also brought into question the accounting practices and activities of many corporations in the United States and was a factor in the creation of the Sarbanes–Oxley Act of 2002. The scandal also affected the greater business world by causing the dissolution of the Arthur Andersen accounting company. Enron filed for bankruptcy protection in the Southern District of New York during late 2001 and selected Weil, Gotshal & Manges as its bankruptcy counsel. It ended its bankruptcy during November 2004, pursuant to a court approved plan of reorganization, after one of the most complex bankruptcy cases in U.S. history. A new board of directors changed the name of Enron to Enron Creditors Recovery Corp, and emphasized reorganizing and liquidating certain operations and assets of the pre-bankruptcy Enron. On 7th September 2006, Enron sold Prisma Energy International Inc., its last remaining business, to Ashmore Energy International Ltd. Nature and financial position

Revenue recognition
Enron and other energy suppliers earned profits by providing services such as wholesale trading and risk management in addition to building and maintaining electric power plants, natural gas pipelines, storage, and processing facilities. When accepting the risk of buying and selling products, merchants are allowed to report the selling price as revenues and the products' costs as cost of goods sold. In contrast, an agent provides a service to the customer, but does not take the same risks as merchants for buying and selling. Service providers, when classified as agents, are able to report trading and brokerage fees as revenue, although not for the full value of the transaction. Although trading companies such as Goldman Sachs and Merrill Lynch used the conventional agent model for reporting revenue (where only the trading or brokerage fee would be reported as revenue), Enron instead elected to report the entire value of each of its trades as revenue. This "merchant model" was considered much more aggressive in the accounting interpretation than the agent model. Enron's method of reporting inflated trading revenue was later adopted by other companies in the energy trading industry in an attempt to stay competitive with the company's large increase in revenue. Other energy companies such as Duke Energy, Reliant Energy, and Dynegy joined Enron in the wealthiest 50 of the Fortune 500 mainly due to their adoption of the same trading revenue accounting as Enron. Between 1996 to 2000, Enron's revenues increased by more than 750%, increasing from $13.3 billion during 1996 to $100.8 billion during 2000. This extensive expansion of 65% per year was unprecedented in any industry, including the energy industry which typically considered growth of 2–3% per year to be respectable. For just the first nine months of 2001, Enron reported $138.7 billion in revenues, which placed the company at the sixth position on the Fortune Global 500. What when wrong

Enron's complex financial statements were confusing to shareholders and analysts. In addition, its complex business model and unethical practices required that the company use accounting limitations to misrepresent earnings and modify the balance sheet...
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