Detailed Analysis of Enron's Collapse: Financial Accounting Report

This report provides a comprehensive analysis of the Enron collapse, examining the key factors that contributed to its failure. It delves into the accounting practices employed by Enron, including the use of future value for asset valuation and manipulation of financial reports to portray a positive financial standing. The report also explores the role of debt financing, joint ventures, and the top management's priorities in the company's downfall. Furthermore, the report contrasts the financial reporting methods of Bega Cheese and Mackay Golf Club, comparing the application of IFRS and US GAAP. It highlights differences in revenue recognition, expense classification, and inventory valuation, concluding that while both frameworks have strengths, IFRS may offer greater clarity for users. The report uses information to determine the value of different facts and measurement of values, providing a valuable resource for understanding financial accounting and its impact on business outcomes.

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ADVANCE FINANCIAL ACCOUNTING

Part A
The collapse of Enron Limited was supported by many points and key factors that were
presented by the analysts with various explanations:
A. All the assets and liabilities of the organization why recorded at the future value so as to
ascertain the marketing conditions in the present situation. The technique which is used by
the organization analyses the present prices as the base ones and the expected future prices
are determined at a very high value because of the exposure to fluctuations. These techniques
are commonly used by the organizations while getting involved in long-term contracts so as
to determine the costs and expenditures that are made on the assets for the determination of
the PV of the future cash flows.
It was also observed that the organization had already make decisions which will help it to
earn their revenue quickly. The scheme used by the organization to earn daily profit posed
them to a disadvantage and led it to ignore any profit or loss suffered by it. The Organisation
was involved in many contracts with me help them to earn profits in the future which can be
used to repay any debts or expenses of the organization (Matthew, 2015). A test carried out
by the organization stated that there were many contracts that were not profitable for the
company because of which manipulation and alternations where do we made in the financial
reports so as to save the firm's reputation for the future (Berensen, Richard & Oppel, 2001)
B. The funds provided to the organization have been collected with the help of debt financing
and equity investors. The money that has been gathered by the organization was used to fulfil
the tasks of loan sanctioning, risk sharing, financial risk management, and asset transfers. A
huge amount of capitals were gathered by the organization that can be used to fulfil various
purposes and projects that will help the organization to prosper in the future. Because of the
increase in funds, the transaction also increased which may have led to manipulations in the
financial report. Hence, proper scanning of the reports was made in order to find the
vulnerabilities present in the report. In the year 1997, the organization Enron Limited was
going to enter into a partnership for a joint venture process. The Organisation was busy in
preparing the contract statement because of which it was not able to analyze the financial
statements properly which consisted of various transaction results and losses. Formal
announcements were made and Company was still urging to enter into a joint venture. This
led to the violation of a lot of accounting principles and Standards that were not used while
preparing the financial statements (Healy & Palepu, 2003). The debt, as well as the liabilities
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of the organization, was understated in the balance sheet because of which problems were
faced by the company in the future.
The disclosures made by the organization were in association to the SPE. The population was
aware of such techniques and still trusted the company for making Investments in it. Many
representatives were assigned in order to analyze and disclose the factors of SPE using the
gathered funds in order to maintain the leverage of the financial reports of the organization
(Healy & Palepu, 2003).
The top management structure of the organization gives priorities to some facts that will help
them to work in accordance with the investor’s point of view. These priorities will also help
the organization to hide the irrelevant intentions and earn huge profits. A lot of information in
relation to the stock and threats related to it were analyzed. This can be clearly understood by
the help of agency theory which states diet the organization and the top level management
can make several decisions for the fulfilment of self-interest (Hoffelder, 2012). Hence, the
theory clearly states that the officials work for their own interest and profit only. While
analyzing the accounts of Enron Limited, it was observed that the management was the major
official which provided with the stock options. Also, the total amount of public investments
were increased which can only be achieved if the company was earning profits at a high rate
in its day to day business.
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Assessment part B
A. There is various type of mechanism present in the organization which can be used to
determine different elements of the financial accounts. The financial accounts of an
organization are the backbones of the company and investors. A similar framework was
adopted by the Bega Cheese who are making evaluations on the basis of Fair value on the
prophets that were received by them. The evaluation of the inventory was made using the
weighted average cost method after analyzing the net realizable value of the Asset or the cost
of asset whichever was lower (Bega Cheee, 2017).
The financial report of the organization states that there exists a threat to the organization in
terms of the amortized cost which was calculated using the method of effective interest. The
borrowings made by the organization were also valued on the fair value fewer transaction
costs, which were later amortized. A clear understanding of the difference has been reflected
in the consolidated statements of the organization.
Income statement
Another company of the United States tried to present a comparison of the financial
statements for the analysis of the principles of GAAP. The company was Mackay Golf Club
whose financial accounts were computed using particular methods. The revenues of the
organization were recognized on the basis of the expenses that were incurred by the
organization which is generally stated to be as the input method.
The total value of inventory was to be determined using the market price or the cost price
whichever was having a lower value. The Other assets like the trade receivables and the long-
term receivables were estimated on the basis of their present values. The fixed assets of the
organization were evaluated on the basis of cost depreciation which was calculated using the
straight-line method (Meeks & Swann, 2009). Much important information’s were provided
by the annual report published by the organization which can be further used to career the
decision-making process in a proper manner.
B. The above-mentioned companies were using various types of the method in order to
compute the financial statements. Therefore, it was difficult to comment on the overall
accuracy that was provided by the statements in comparison to others. There are many parts
that are ranked higher in IFRS and other ranks are ranked higher while applying the US
GAAP principles (Ross et. al, 2014). This can be understood with the help of fact that
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revenue recognition is generally made by IFRS but it can also be identified using the income
statement provided by the US GAAP. All the expenses of the organization should be
mentioned in the best possible manner so as to provide important information to investors. It
can be further stated that the use of IFRS in the presentation will be appropriate as it
identifies all the values and helps to convey a better decision to the users (Nobes & Parker,
2010). The formulation of the financial statements by using the IFRS makes it simple for the
user to understand and improve the effectiveness of the decision-making process.
C.IFRS and the US GAAP
The companies that have been considered for the evaluation are not having similar situations
because of which proper compatibility cannot be insured. Therefore a General Outlook has
been presented after a thorough analysis:
Comparison Techniques used in IFRS Techniques used in U.S
GAAP
Basic regulations of
income statement
No Format is mentioned
particularly.
There are different formats
that are to be used while
preparations of the financial
accounts.
Recognition and
classification of the
expenses
There are various types of
techniques mentioned under the
IFRS system that can be used for
the recognition of revenue (Walker,
Chua & Taylor, 2008).
The classifications are made
on the basis of functions.
Utilization of
historical costs or
Fair Value/ revalued
costs
Any of the methods can be used for
the ascertainment of accounts.
Use of Historical cost is
made.
Inventory Valuation FIFO or the weighted average
method can be used for the purpose
of valuation.
LIFO can be adopted for the
calculation purposes.
Disclosure of
extraordinary items
The disclosures are to be stated in
the notes to accounts if the
disclosures of any such
If the statements are made
by using the GAAP, then the
proper disclosures can be
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extraordinary items have been made
(Walker, Chua & Taylor, 2008).
made.
The examples mentioned above was stated after making a clear analysis of the financial
statements of the organization which was selective in nature. It can also be observed after the
comparison off the table that there are various types of methods which can be utilized for the
purpose of international financial reporting (Chapman, Cooper & Miller, 2009). These
techniques can help the organization to compute and understand the financial statements in a
much-established manner. The calculations of the values of different facts can be measured
using the information that has been provided in the financial statements of the organization.
Therefore, it can be clearly stated that the IFRS framework of accounting is much more
favourable for the users because of the simple nature.
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References
Berensen, A.,Richard, A., and Oppel, JR. (2001) Once-Mighty Enron Strains Under Scrutiny.
Available from https://www.nytimes.com/2001/10/28/business/once-mighty-enron-strains-
under-scrutiny.html [Accessed 30 September 2018]
Bega Cheee. (2017) Bega Cheee Annual report & accounts 2017. Available from:
http://www.annualreports.com/HostedData/AnnualReports/PDF/ASX_BGA_2017.pdf
[Accessed 30 September 2018]
Chapman, C,S., Cooper, D.J & Miller, P (Eds). (2009). Accounting, organizations, and
institutions: Essays in honour of Anthony Hopwood. Oxford: Oxford University Press.
Healy, P.M & Palepu, K.G. (2003) The Fall of Enron. Journal of Economic Perspectives.
17(2), 3-26. Available from: https://www.aeaweb.org/articles?
id=10.1257/089533003765888403 [Accessed 30 September 2018]
Hoffelder, K. (2012) New Audit Standard Encourages More Talking. Harvard Press.
Matthew, S. E. (2015) Does Internal Audit Function Quality Deter Management
Misconduct?. The Accounting Review. [online]. 90(2), pp. 495-527. Doi:
https://doi.org/10.2308/accr-50871 [Accessed 30 September 2018]
Meeks, G., Swann, G.M.P. (2009) Accounting standards and the economics of standards.
Accounting and Business Research. International Accounting Policy Forum. 39(3), 23-44.
Doi: https://doi.org/10.1080/00014788.2009.9663360
Nobes, C & Parker, R (2010) Comparative International Accounting. FT Prentice Hall.
Ross, S., Christensen, M., Drew, M., Bianchi, R., Westerfield, R. & Jordan, B. (2014)
Fundamentals of Corporate Finance, 7th ed. North Ryde: McGraw-Hill Australia Pty Ltd.
Walker, M, Chua, W.F., & Taylor, S. L. (2008) The rise and rise of IFRS: An examination of
IFRS diffusion. Journal of Accounting and public Policy. 27, 462-473. Available from:
http://eprints.kingston.ac.uk/19809/1/Dunhill-A-19809.pdf [Accessed 30 September 2018]
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