case enron

Topics: Finance, Debt, Risk Pages: 1 (294 words) Published: February 24, 2014
What were the business risks enron faced, and how did those risks increase the likelihood of material misstatements in enron's financial statement

Enron faces most of the risk ordinarily faced by any energy company, including price instability and foreign currency risks. Enron operated in many different areas of the world with different regulatory and political risks.

Enron faced business risks such as a complex business model, extensive use of derivatives and special purpose entities, aggressive transaction structuring and accounting, rapid expansion of business through complex and unconventional ventures, extensive reliance on credit rating, and limitations in GAAP. The complex nature of the business model of Enron increased the likelihood of material misstatements. It enabled the management to overstate its revenue while not disclosing the actual value of its debt. The risk of fraud by management was high. The transactions involving SPE's essentially involved Enron receiving borrowed funds that were shown as revenue without recording liabilities. Also, the amount of misstatements was huge as Enron had hundreds of such SPE's. Complex financial derivative transactions were used to hide enormous amounts of debt. Huge increases in borrowing were made to look like hedges for commodity trades rather than new debt financing. The network of SPE's along with complicated speculations and hedges kept an enormous amount of debt off the balance sheet. The accounting standards were inadequate in providing for the proper accounting of these transactions. The loopholes in the standards were used to structure transactions in such a way that hundreds of SPE's were excluded from consolidation. Also, the management took advantage of the complexity of accounting standards to shroud the actual economic substance of the transactions. Adequate disclosures with regard to related party involvement and securing outside SPE investors against possible losses were not made.
Continue Reading

Please join StudyMode to read the full document

You May Also Find These Documents Helpful

  • Enron Case Essay
  • Essay about Enron case
  • 1 What Problems Did Enron EncounteredMany Essay
  • Essay about Enron Case Study
  • Auditing issues in Enron case Research Paper
  • Essay on the case study of enron
  • Essay about Enron & Tyco Case Studies
  • Enron Research Paper

Become a StudyMode Member

Sign Up - It's Free