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Essay / Research Paper Abstract
This 7-page paper focuses on financial methodologies and deceptive reporting. Issues addressed include the Enron deception, the UAL bankruptcy filing and how to detect fraud in accounting. Bibliography lists 4 sources.
Page Count:
7 pages (~225 words per page)
File: D0_MTfindec.rtf
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Unformatted sample text from the term paper:
problem is fairly simple - the company used creative methods to conceal debt, the company had a severe lack of transparency when it came to reporting financial affairs and all
of it was given a tacit blessing by auditor Arthur Andersen (Thomas, 2002). Furthermore, no one questioned it - Wall Street didnt question the lack of transparency nor did the
business media. In fact, when Fortune journalist Bethany McLean wrote an article during the spring of 2001 questioning some of Enrons practices and its lack of transparency, analysts and other
journalists brushed her off. In a sense, therefore, Enron was everyones fault. But Enron was able to perpetuate deception based on "mark-to-market
accounting" practices, which were common in the energy trading business during the mid-1990s (Thomas, 2002). Under the mark-to-market rules, if companies have outstanding energy-related or derivative contracts on their balance
sheets at the end of a quarter, they must adjust those contracts to fair market value, while booking unrealized gains/losses to the income portion of the balance sheet (Thomas, 2002).
But the problem here is that its difficult to base valuations on long-term futures contracts, so companies are able to develop and use their own discretionary valuation models - which
is precisely what Enron did (Thomas, 2002). Because of this, Enron, before everything collapsed, boosted valuation estimates, with unrealized trading gains accounting for a little more than half of the
companys $1.41 billion reported pretax profit for 2000 (Thomas, 2002). But as the market began falling apart during 2000 and competition heated
up, causing the margin of Enrons profit to drop, in order to satisfy credit agencys requirement for leveraged ratios, Enron attempted to hide its debt by burying it (Thomas, 2002).
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