Advance Financial Accounting: Enron's Misuse of Mark-to-Market Accounting and Special Purpose Entities

Running head: ADVANCE FINANCIAL ACCOUNTING
Advance Financial Accounting
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Table of Contents
Assessment Task Part A:............................................................................................................2
a) Defining the overall mark-to-market accounting approach with examples, while detecting
the misuse, this was conducted by Enron’s Management for portraying a rose picture of its
performance:..............................................................................................................................2
b) Discussing about the special purpose entities, while indicating how the management of
Enron was able to fund contracts or achieve financial reporting objectives:.............................3
c) Discussing and arguing about the high compensation, this has been conducted by Enron’s
management, while using adequate agency theory:...................................................................4
Assessment Task Part B:............................................................................................................5
a) Quoting examples of measurement methodologies from company’s annual reports:...........5
b) Explaining how the measurement method provided decision-usefulness information, while
understanding the decision useful information to be:................................................................6
c) Providing critical analysis of the techniques the selected companies have used for
deploying more useful or practice than another method:...........................................................7
References and Bibliography:....................................................................................................9

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Assessment Task Part A:
a) Defining the overall mark-to-market accounting approach with examples, while
detecting the misuse, this was conducted by Enron’s Management for portraying a rose
picture of its performance:
Mark-to-market accounting approach relevantly allows the organisation for using the
current accounting rules and present value framework for recording transactions, which might
allow the management to forecast its future earnings. Therefore, with the help of Mark-to-
market accounting approach the management of Enron was mainly able to recognise the
income and forecast the overall ungory prices and interest rates in future. The Mark-to-
market accounting approach can eventually allow the organisation to evaluate a particular
scenario, where the financial performance of the organisation can be forecasted in accordance
with the approach. Healy & Palepu (2003) argued that due to the loopholes in the Mark-to-
market accounting approach the organisations were mainly able to manipulate their annual
report and portray high yielding results in their annual report for future performances.
The manipulation was mainly conducted by the management in their Mark-to-market
accounting approach, where the unreleased gains and expenses were accounted by the
organisation without the possibility of its occurrence. The primary problem was mainly
detected, when the overall Blockbuster deal was signed for 20-years for the value of $110
million, where the management went ahead and recognised the estimated profits in the annual
report even when the serious questions was arising regarding he technical vitality of the deal.
The second major mistake, which was made by the management of Enron, was the inclusion
of contract for supplying the electricity to Indianapolis for $1.3 billion. The management
discounted the overall income, which increased the level overall revenues for the fiscal year

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by half a billion (Carberry & Zajac, 2017). The income of the organisation was mainly not
realised in actual where the estimated income of the organisation was mainly depicted with
the help of Mark-to-market accounting approach. This increment in revenue was mainly not
realised by the organisation, which inflated the financial position of the organisation even
when the actual income was not generated by the organisation. Hence, with the help of Mark-
to-market accounting approach the management of Enron was able to manipulate their annual
report and increase the level of income from their operations.
b) Discussing about the special purpose entities, while indicating how the management
of Enron was able to fund contracts or achieve financial reporting objectives:
The management of Enron was mainly utilising off-balance sheet financing estimates
known as Special Purpose Entities for financing many of their transactions. The relevant
reposting issues of Enron were mainly detected in the Special Purpose Entities, which was
manipulated by the organisation for conducting their operations. The management was
mainly using the Special Purpose Entities for acquiring the gas reserves from producers,
where investor of the special purpose was provided with stream of revenue from the sales of
the reserves (Markham, 2015). The management of Enron was mainly utilising the Special
Purpose Entities for supporting the purchase of forward contract with gas producers for
supplying the gas to utilities under long-term fixed contracts. During the fiscal year of 2001,
the organisation was holding hundreds of the Special Purpose Entities for supporting their
purchases and reduces the risk attributes of the operations. Nevertheless, the management of
Enron was manipulating the Special Purpose Entities for manipulating their overall financial
reports for reducing their acquired debt (Markham, 2015).
The management of Enron directly utilised the Special Purpose Entities for
manipulating their acquisition of different joint ventures and reduce the occurrence of debt in