Accounting Finance Lessons Of Enron: A Case Study


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The costs were the prices paid for the assets. The Trial Ms Ruemmler states p. Lay and Mr. Remember that the water business was acquired by Mark, Skilling, and Lay at premium prices in — His valuation of the acquired assets was likely to be conservative.

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It is not surprising that Enron management was not willing to concede defeat two years later. But Ms Ruemmler sees the refusal to write the assets down differently p. Second, the amount of deposits by the California customers was not explicitly given on p. The deposits of the year were expected to be repaid by Enron in A buyer of Enron stock was not likely to be buying the stock because of incomes from Broadband or Azurix.

Skilling is accused of having said good things about Broadband and Azurix, but the facts that there were losses associated with Broadband and Azurix were available to the investors. For example, we would like to know, how much of the income was related to the holding of Enron stock and Enron stock price increases by nonconsolidated subsidiaries? It was not enough March 25, b ch02 FA Enron as of 31 December 17 for the users of the report to be given the income by operating segments. Certain of the credit agreements contain prefunding covenants.

EconPapers: Accounting/Finance Lessons of Enron:A Case Study

It is not a positive sign. The very large increase in revenue in was necessary for a relatively small increase in income. The returns on stock equity for the three years are at best only fair. Long-term debt was 0. This is not a shockingly large percentage of long-term debt.


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Note that the following note makes reference to the early settlement of debt and to the issuance of additional shares of Enron stock, but the magnitude of the debt and the amount of potential issuance are not disclosed p. The impact of this early settlement could include the issuance of additional shares of Enron common stock.

ACCOUNTING/FINANCE LESSONS OF ENRON: A CASE STUDY

The initial conversion premium was 0. This will not turn out to be a good investment for the buyers of the bonds. Since they expected the stock price to increase, they were willing to buy a convertible note with a large conversion premium. Enron managed the following risks: Commodity price risk; Interest rate risk; Foreign currency exchange rate risk; Equity risk.

We shall see that the management of equity risk is most challenging p. Equity Risk.

Accounting/Finance Lessons of Enron: A Case Study

Enron applied J. The use of value at risk models allows management to aggregate risks across the company, compare risk on a March 25, b ch02 FA Enron as of 31 December 21 consistent basis and identify the drivers of risk. The report of the independent public accountant included the conventional standard statement p. It is important to note that Enron had real assets and had real operations as well as less real trading operations wholesale business. There are cleverly structured preferred stock securities that give rise to an interest deduction for tax purposes, even though they are called preferred stock.

This type of securities is not unique to Enron. It is a form of security that Wall Street Investment Banks like to sell and the issuance of which the US Treasury would like to prevent but so far the Treasury has not been successful. Mark-to-Market Enron uses mark-to-market accounting for the instruments utilized in trading activities p.

Unfortunately, mark-to-market accounting was also used in cases where the market value had to be estimated rather than observed. This practice introduced an excessive amount of arbitrary and subjective evaluations into the income and asset measures. One type of sale transaction involves securitization. The securitization might take the form of a swap p. These transactions were of a material size. Unfortunately, the footnote 3 and p. For example, the swaps limit the risks assumed by the purchaser.

Enron recognized no gain or loss on these transactions p. Whitewing has relevance in other aspects since it is an entity with ties to Enron employees. Guarantees Guarantees of liabilities of unconsolidated entities and residual value guarantees have no carrying value and fair values which are not readily determinable… p.

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Generally accepted accounting principles do not require the recording of a liability for guarantees. The merchant investments were carried at fair value. The decrease in value was probably related to both decreases in value and sale of assets. Substantive merchant investments were made in energy, energyintensive industries, technology-related power plants, and natural gas transportation p.

Subsidiaries located in tax havens facilitated this tax strategy. Another factor was that the gains on merchant assets were not realized for tax purposes ; thus Enron did not have to pay tax on a large percentage of its accounting income which included these unrealized gains. Stock options that are taxed to its executives give rise to a tax deduction for Enron. The numbers in the annual report for tax expense will mislead a reader who wants to determine the actual amount of federal income taxes paid by Enron.

Will it ever be able to use this credit? It also has large tax loss carryforwards p. This is 0. Azurix p. A decrease in Enron common stock price could result in an enormous amount of dilution in the Enron stock value per share. Unfortunately, the above paragraph is not as clear as a reader might like. The above is extracted from footnote 10 p. How much preferred stock can be issued, and convertible on what basis? Derivatives p. Again there is too much not revealed.

To what type of derivatives does the above note refer?

While not in great shape, the pension fund assets and liabilities are reasonably close in value. Related Party Transactions pp. The limited partners of the Related Party are unrelated to Enron. Management believes that the terms of the transactions with the Related Party were reasonable compared to those which could have been negotiated with unrelated third parties. In , Enron entered into transactions with the Related Party to hedge certain merchant investments and other assets.

Again, the notes are not quite as clear as we would like but they do disclose much relevant information. Also, Enron contributed a put option to a trust in which the Related Party and Whitewing hold equity and debt interests. Several footnotes could have been written in a more informative manner, but a reader should have been alerted to the fact that more information was needed. On the other hand, Enron had a reasonable operating performance in as well as and and its balance sheet appeared to be strong.

see Including the debt of the unconsolidated subsidiaries does not change that conclusion if the debt and the equity ownership of the subsidiaries are shown in proportionate amounts. A careful thorough analyst of Enron would like to know more about the SPEs. He recommends self-regulation: And, in the end, we need to create a powerful and effective self-regulatory organization with credible disciplinary authority to enforce accounting rules and standards. It would be far better for the industry to respond itself to the current crises than to await the likelihood that the political process will do so for them.

Senator Fred Thompson made a very perceptive observation Newsweek, 4 February , p. It would have been very useful if the year Enron Annual Report had discussed in detail the sources for the incomes for the years — Thus, a minimum of information regarding the SPEs of Enron was presented to the reader of its annual report. Enron: The Rise and Fall.

Accounting Finance Lessons Of Enron: A Case Study Accounting Finance Lessons Of Enron: A Case Study
Accounting Finance Lessons Of Enron: A Case Study Accounting Finance Lessons Of Enron: A Case Study
Accounting Finance Lessons Of Enron: A Case Study Accounting Finance Lessons Of Enron: A Case Study
Accounting Finance Lessons Of Enron: A Case Study Accounting Finance Lessons Of Enron: A Case Study
Accounting Finance Lessons Of Enron: A Case Study Accounting Finance Lessons Of Enron: A Case Study
Accounting Finance Lessons Of Enron: A Case Study Accounting Finance Lessons Of Enron: A Case Study
Accounting Finance Lessons Of Enron: A Case Study Accounting Finance Lessons Of Enron: A Case Study
Accounting Finance Lessons Of Enron: A Case Study Accounting Finance Lessons Of Enron: A Case Study
Accounting Finance Lessons Of Enron: A Case Study

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