Enron Case Study

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#4 The Enron Company was created in 1985 when Inter-North took up Houston Natural Gas. After the formation of the new company, Enron pursued many non-energy related fields of business including internet bandwidth, risk management, and weather insurance for seasonal businesses. Enron was extremely successful in their different businesses and, their numbers were showing that they were highly profitable and successful as a business. Because their numbers were extremely excellent, investigations began into their business, offshore partnerships, and accounting journals.
In 1992, the President of Enron’s trading operations was Jeff Skilling. Skilling persuaded federal regulators to allow Enron to put forth and operate their business on an accounting system that was called “market to market accounting”. In market to market accounting, the price or value of a security is recorded on a daily basis to calculate profits and losses. This type of accounting was used only by brokerage and trading companies. With market to market accounting Enron was able to count and journalize projected earnings from the long term contracts, and use that as its current earnings and income. This essentially means that Enron used market to market accounting to state that their profits were high because of their money that they were going to collect in the future.
This money was going to be collected in the future in many years because of contracts or memberships that the energy company had with customers. The contracts with other parts of Enron business were also projected into the accounting numbers. This way of doing accounting in a business was thought to potentially manipulate projections to make them look better, in order to inflate business revenue. Thi...

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...rnment prosecuted him under an invalid legal theory. He also defended himself by stating that the jury was biased because it was in Houston where ENron’s headquarters were. He said that the people of Houston would be biased against him and also Enron for being associated with big financial trouble. That motion was revoked by the Jury. Many executives at Enron were indicted for a variety of charges and were later sentenced to prison. After the Enron trials, new legislation and regulations were made to prevent further inaccuracy of financial statements. The most notable new legislation was the Sarbanes-Oxley Act. This act increased penalties for destroying, altering, or fabricating records in federal investigations or for attempting to defraud shareholders. The act also increased the accountability of auditing firms to remain unbiased and independent of their clients.

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