The Enron Collapse By: Jeff Porter Kevin Clark ... - Franklin College
The Enron Collapse By: Jeff Porter Kevin Clark ... - Franklin College
The Enron Collapse By: Jeff Porter Kevin Clark ... - Franklin College
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Threats<br />
<strong>The</strong>re are many threats <strong>Enron</strong> faces. Competitors could come in and steal some<br />
partners <strong>Enron</strong> does business with potentially taking away profits from <strong>Enron</strong>. Threats<br />
exist that newer technology will provide alternative energy sources to oil and gas,<br />
<strong>Enron</strong>’s two major sources of energy. A possible threat would also be if the energy<br />
market became regulated again and trading could not occur.<br />
Internal Flaws<br />
Accounting<br />
Another problem <strong>Enron</strong> faced was the aggressive accounting style used to inflate many<br />
figures on their financial statements. Many complicated partnerships with special purpose<br />
entities and other subsidiaries made the accounting even more confusing. <strong>The</strong>se methods<br />
helped <strong>Enron</strong> manipulate their revenue and earnings.<br />
“Mark to Market” Accounting<br />
<strong>Enron</strong> used “mark to market” accounting, which allowed them to adjust the value of a<br />
security or asset to reflect the current market value (20). This procedure allows<br />
companies to book as current earnings their expected future revenue from certain assets<br />
(7). <strong>The</strong> introduction of volumetric production payments opened the door for this type of<br />
accounting. <strong>The</strong>se payments were contracts that had a predictable future cash flow and<br />
could be treated as merchant assets meaning the assets held on <strong>Enron</strong>’s books could be<br />
traded at any time if they received a suitable offer (20). <strong>The</strong> SEC granted <strong>Enron</strong><br />
permission to mark these assets to market in 1991 and was supposed to be on a temporary