The Fall of Enron: Mark-to-market strategy, SPE, and Stock options

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HA 3011 Advanced Financial Accounting Assessment item 2 —
Assignment

The Fall of Enron
Executive Summary
The downfall of Enron can be defined as one of the greatest fall that wiped huge wealth of the
investors. The management of the company portrayed rosy pictures that led to the depiction
of wrong information and lead to duping of the innocent investors. The current report ss
based on the downfall of Enron that is studies in the light of the article provided by Paul M.
Healy and Krishna G. Palepu.
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The Fall of Enron
Contents
Introduction...........................................................................................................................................4
a) Mark-to-market strategy...............................................................................................................4
b) SPE or special purpose entities......................................................................................................4
c) Stock options.................................................................................................................................5
Conclusion.............................................................................................................................................7
Part B.....................................................................................................................................................8
References...........................................................................................................................................12
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The Fall of Enron
Introduction
From the article of Paul M. Healy and Krishna G. Palepu, it is notable that Enron undertook
massive risks while presenting its financial statements that resulted in its downfall. The
accounting standards were used by the Enron in a wrong manner that led to the reflection of
wrong details. The mark-to-market mechanism was used to fool the public followed by the
wrong usage of SPE and then using the stock options in a complex manner.
a) Mark-to-market strategy
In relation to fair value accounting, mark-to-market strategy is more likely to be
regarded as such fair value accounting of liabilities and assets that relies on the market
prices. Further, in such accounting measure, the present market prices are accounted
for as the primary base of every transaction and the same is also prone to immense
fluctuations owing to the volatility in market. Nonetheless, this strategy is utilized by
the organization in association with the long-term contracts in association with mark-
to-market accounting. In addition to this, the expenses and income for long-term
contracts are also accounted for by depending on the present value of the future flow
of cash (Healy & Palepu, 2003). Therefore, when the prices are more volatile in the
market in the sense that they decrease or increase, the same cannot be properly
adjusted or aligned in the company’s books. Overall, the flaws in company’s profits
were huge in the sense that resulted in the downfall of Enron and its misguiding
financial statements. In addition, Enron also ascertained its revenues as the fair values
of all inflows of cash in the upcoming tenures and the booked expenses on a whole.
The losses and gains were also unrealized in the upcoming years when that happened.
Nonetheless, the company was involved in various long-term business contracts that
reflected the present value of all future flows of cash as the income and present value
of expenses to be incurred during the overall contract as the service cost.
Nevertheless, there were various contracts that also failed to pass the viability test in
the upcoming year of the contract that permitted Enron to depict a false picture of its
financial performance (Hoffelder, 2012).
b) SPE or special purpose entities
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