Advance Financial Accounting: Enron Scandal and Telstra Corporation

Running head: ADVANCE FINANCIAL ACCOUNTING
Advance Financial Accounting
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ADVANCE FINANCIAL ACCOUNTING
Contents
Introduction:....................................................................................................................................2
Part A:..............................................................................................................................................2
Part B:..............................................................................................................................................5
Conclusion:......................................................................................................................................8
References:......................................................................................................................................9

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ADVANCE FINANCIAL ACCOUNTING
Introduction:
The confidence of users of financial statements hit the rock bottom on accounting and
financial reporting post the publication of Enron Scandal in October, 2001 that led to the
dissolution of the company, Enron Corporation. The accounting scandal of Enron highlighted the
number of shortcomings of different accounting concepts and auditing failure to such a large
extent. A brief discussion on the different aspects of accounting shall be made in this document
by keeping in mind the accounting scandal at Enron Corporation.
Part A:
(a) Mark to market accounting:
Mark to market accounting better known as Fair Value Accounting is the accounting method that
measures the amount of assets and liabilities on the basis of current market price. Since 1990 the
concept of mark to market accounting has been an integral part of Generally Accepted
Accounting Principles (GAAP). Though the concept is now often regarded as the gold standard
to disclose the true and fair picture of an organization via financial statements however, the
management of Enron used it for their personal benefits and gains at the expenses of the
company (Chen, Shroff & Zhang, 2017).
The accounting in Enron’s natural gas business was fairly simple. Actual revenues received from
selling the natural gas used to be recorded in the profit and loss account and the actual cost of
supplying such natural gas was charged against such revenue to disclose the amount of profit or
loss from business operations. However, the accounting method was changed to mark-to-market
accounting subsequent to the demand made by Skilling after joining the company (Terando,
Cataldi & Mennecke, 2017). According to Skilling mark-to-market accounting would reflect the

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true economic value of company’s natural gas business and its performance. In an out of the box
decision, at the time of the decision at least it seemed that way, the company became the first
non-financial company to use the method for reporting its long term contracts. As per the method
of accounting the accountants required to record estimated amount of income from long term
contracts immediately subsequent to the signing of such contracts. Such income was estimated at
the present value of net cash flows in the future (Welch, 2017). The management recorded high
amount of expected earnings even from long term contracts whose viability related to costs and
future cash flows were difficult to estimate. The management kept on recording income from
projects without even verifying the ability of the company to recover such income in the future.
As a result the investors were provided with false and misleading information. The management
failed to match the profits and cash due to recording income from long term contracts that never
generated any income in reality. The large discrepancies between cash and income were
compensated by providing false and misleading financial reports to the shareholders and
investors of the company. As a result the future earnings of the company as per the books of
accounts kept on increasing without any realistic possibility for the company to generate such
income in the future. With no profits could be included in future years from number of projects
the management manipulated the accounts by including income from fictitious projects (Magnan,
Menini & Parbonetti, 2015).
Thus, a rosy picture of the company was portrayed by using mark-to-market accounting to
appease the investors of the company with the objective of keeping the share prices of the
company as high as possible.
(b) Use of special purpose entity concept by Enron: