Case Study 1.1 Enron
CASE STUDY – UNIT 1
1. Andrew Fastow is a key person responsible for the downfall of Enron. When he became the CFO in 1998, he came up with the plan to make the company appear in great shape by using the mark-to-market accounting practice. The company would build an asset, such as a power plant, and immediately claim the projected profit on its books, even though it hadn't made one dime from it. If the revenue from the power plant was less than the projected amount, instead of taking the loss, the company would then transfer these assets to an off-the-books corporation, where the loss would go unreported. This type of accounting created the attitude that the company did not need profits, and that, by using the mark-to-market method, Enron could basically write off any loss without hurting the company's bottom line (Seabury, 2014).
SEC and FASB are also key. In the early 1990s, the SEC and FASB had wrestled with the controversial accounting and financial reporting issues of SPEs. There was intense debate but the SEC and FASB did not offer guidance or a solution. SEC and FASB were fully aware there was concern with this reporting but did not take it very seriously and let it slide by.
Arthur Anderson is also a key. The auditors did work for Enron but they are also to guide the company in the right direction of financials. With the use of the SPEs and mark-to-market accounting, it was kind of a loophole in financial reporting. Since can report and not report assets and liabilities in SPEs, auditors were aware of the shift of these items from Enron to the subsidiary companies.
Seabury, C. (2014). Enron: The Fall of a Wall Street Darling. Retrieved from http://www.investopedia.com/articles/stocks/09/enron-collapse.asp
2. Management Participation - This occurs when the accountant takes on the role of client management or otherwise performs management functions. It may exist when the accountant serves as an officer or direct of the client, establishes and
1. Andrew Fastow is a key person responsible for the downfall of Enron. When he became the CFO in 1998, he came up with the plan to make the company appear in great shape by using the mark-to-market accounting practice. The company would build an asset, such as a power plant, and immediately claim the projected profit on its books, even though it hadn't made one dime from it. If the revenue from the power plant was less than the projected amount, instead of taking the loss, the company would then transfer these assets to an off-the-books corporation, where the loss would go unreported. This type of accounting created the attitude that the company did not need profits, and that, by using the mark-to-market method, Enron could basically write off any loss without hurting the company's bottom line (Seabury, 2014).
SEC and FASB are also key. In the early 1990s, the SEC and FASB had wrestled with the controversial accounting and financial reporting issues of SPEs. There was intense debate but the SEC and FASB did not offer guidance or a solution. SEC and FASB were fully aware there was concern with this reporting but did not take it very seriously and let it slide by.
Arthur Anderson is also a key. The auditors did work for Enron but they are also to guide the company in the right direction of financials. With the use of the SPEs and mark-to-market accounting, it was kind of a loophole in financial reporting. Since can report and not report assets and liabilities in SPEs, auditors were aware of the shift of these items from Enron to the subsidiary companies.
Seabury, C. (2014). Enron: The Fall of a Wall Street Darling. Retrieved from http://www.investopedia.com/articles/stocks/09/enron-collapse.asp
2. Management Participation - This occurs when the accountant takes on the role of client management or otherwise performs management functions. It may exist when the accountant serves as an officer or direct of the client, establishes and