Accounting for Enron: Mark to Market Accounting and Special Purpose Entities

Running head: ADVANCED FINANCIAL ACCOUNTING
Advanced Financial Accounting
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ADVANCED FINANCIAL ACCOUNTING
Contents
Part A:..............................................................................................................................................2
Part B:..............................................................................................................................................4
References:......................................................................................................................................9

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Part A:
Mark to market accounting:
(a) Mark to market accounting:
The concept of mark to market accounting better known as Fair Value Accounting (FVA) is the
concept of using current market price to disclose the amount of assets and liabilities of an
organization in financial statements. The inability of historic and traditional valuation method to
correctly disclose the value of non-current and financial assets has led to the development of an
alternative valuation method in accounting, i.e. mark to market account or FVA. In case of assets
that have ready market to sale these are valued using the current market price in such market. In
absence of such market, assets and liabilities are valued on the basis of best available information
about expected prices in the future.
In order to improve the quality of book keeping system and financial reporting Internal
Accounting Standards Board has never shied away from experimenting. Accounting information
are generally presented in the books of accounts using Historical cost basis. However, for
number of years accounting experts have also talked about the benefits of fair value accounting.
In fair value accounting the assets and liabilities are reported at fair values. Marked to market is
nothing but fair value accounting. Thus, under mark to market the business assets of an entity are
revalued at fair market value. The resultant increase or decrease for revaluation of business
assets is adjusted with the profit attributable to the shareholders (Callen, and Luo, 2018).
Though the whole concept of mark to market or fair value accounting was to provide better
financial information to the users of financial statements however, in reality the managements
have made unethical uses of such accounting concept to show higher profit attributable to the

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shareholders and increased amount of assets to paint a better financial picture than the actual
financial state of an organization (Ellul et. al. 2014).
In case of Enron, the company used traditional accounting system to reports its income and
losses from business. However, Skilling demanded that the natural gas business of Enron to
adopt mark to market accounting to reflect true economic value of the natural gas business.
Subsequent to that the natural gas business of the company became the first non-financial
company to use mar to market accounting. Even for complex long term contracts were also
reported using fair value assumptions (Kim, Wasley. and Wu, 2016). In order to measure long
the complex contracts of natural gas business of the company the stakeholders of the business
were provided with false and misleading information. It was done mainly due to the large
discrepancies in matching profit and cash of the business. As a result the profit from long term
contracts that were recorded in the books of accounts under fair value accounting often not even
realized due to unforeseen circumstances. In future years once the long term contracts end up
incurring losses the management continued providing misleading information to appease the
investors. Thus, the objective of Skilling cannot be questioned but the mark to market accounting
resulted in circulation of misleading information about the profit and financial state of the
company (Mixa, Bryant and Sigurjonsson, 2016).
(b) Special purpose entities:
Limited partnerships and companies were created by Enron with the objective of managing the
risks associated with specific assets. By creating special purpose entities Enron started hiding its
debts in the market to portray a better financial picture of the company to ensure that the shares
prices are not affected. In fact by the time it was 2001 the company used more than 100 special
purpose entities to hide its debts in the market. Circumvention of accounting principles and