Assignment on What are the Basic Accounting Theories?

Running Head: ACCOUNTING THEORY
ACCOUNTING THEORY
Name of the University
Author Note

1ACCOUNTING THEORY
Table of Contents
Introduction................................................................................................................................2
Discussion..................................................................................................................................2
Facts of Case..........................................................................................................................2
Guilty of Fraud and Conspiracy.............................................................................................4
Stakeholders’ Theory.............................................................................................................5
Agency Theory.......................................................................................................................6
Tunnelling Theory..................................................................................................................7
Comparison of Theories.........................................................................................................8
Conclusion..................................................................................................................................8
Reference..................................................................................................................................10

2ACCOUNTING THEORY
Introduction
An accounting theory is notion, which uses frameworks, methodologies and
speculations in financial reporting study and the principles of financial reporting are applied
in industry of accounting. The theories serve as basis for understanding financial reporting
and the way financial statements are channeled by using appropriate strategies. The
accounting theory study involves reviewing historical foundations of the accounting practices
and the way accounting practices are added and changed to regulatory framework, which
governs financial reporting and financial statements. It is continuously evolving subject,
which needs to be adapted to new ways of doing the business, latest technological standards
as well as gaps discovered in the mechanisms of reporting (Dibra 2016).
Hence, this report aims to determine the facts of Enron case. Further, the
identification and discussion will be done on facing guilt of conspiracy and guilt by Enron.
Moreover, different accounting theories will be discussed in relation to Enron case. Lastly,
comparison and contrast of different theories will be done and most important theory be
identifying from the perspective of Enron.
Discussion
Facts of Case
Enron was a global Gas and Energy entity, which was dealing in the natural gas
transmission, for instance retail electricity, power generation and energy derivatives. It was
incorporated in the Omaha Nebraska and once it was distinguished as seventh largest
company of Nations. The wealth accumulation by Enron at one pint of time held robust
valuation of market that was higher than other major global entities such as AT&T (Haswell
and Evans 2018). Just months before the bankruptcy filing of Enron in December 2001, this
firm was regarded as the most fastest growing, innovative and best managed business in the

3ACCOUNTING THEORY
America. Further, with swift collapse, thousands of workers of Enron who held stock of
company in their retirement account 401(k), including shareholders, lost tens of the billions
of dollars. This case of Enron indicates that as early as 2000, Enron was in the terrible
financial shape, burdened with money losing businesses and debt and as a result of which
they manipulated its financial statement for hiding these issues (Edel Lemus 2014).
After merger of Enron with Texas based company, it started producing year-over-year
higher yield earnings for their investors. The upward momentum of company encouraged
more shareholders for investing after making in Forbs Fortune 500 list. Further, the turning
point was when company reported quarterly loss of 586 million dollars. It was from August
2000, when the stock of Enron was traded at its all-time high until delisting of stocks in
December 2001, the investors of company lost around $64.2 billion. Only the year before, in
1999, Enron reported total of 893 million dollars in their net income and in 2000, it reported
979 million. These figures have not shown any picture of Enron having an issue of liquidity
(Green III, Baker and Oluwole 2018).
However, the investors of company issued warnings for early emergence of the fraud
symptoms and given reason for escalating the concern. The emergence of these symptoms
was with consolidated balance sheet, in which an amended balance sheet was prepared by
Enron for their investors (Eckhaus and Sheaffer 2018). The auditor of company taken the
responsibility for working on amended balance-sheet. Accordingly, the market responded by
liquidating stocks of Enron because of sudden restatement of accounting. The CEO and
chairman of company faced charges in court and they lost case, which resulted in serving
prison term of 24 years in the federal confinement. In the history of US, collapse of Enron
was largest corporate bankruptcy (Library 2020).