Key Factors Behind The Collapse Of Enron Limited

Assets and liabilities recorded at future value

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 of the organization, was understated in the balance sheet because of which problems were faced by the company in the future.

Quick revenue earning schemes and manipulations

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.

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.

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.

Debt and equity financing

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 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.

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 extraordinary items have been made (Walker, Chua & Taylor, 2008).	If the statements are made by using the GAAP, then the proper disclosures can be 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.

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:  https://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: https://eprints.kingston.ac.uk/19809/1/Dunhill-A-19809.pdf [Accessed 30 September 2018]