Enron Corp. - University of California | Office of The President

executed in accordance with management's general or specific authorization; [and] (ii) transactions
are recorded as necessary (I) to permit preparation of financial statements in conformity with
generally accepted accounting principles ...."
A. Enron's Failure to Consolidate Subsidiaries
and Special Purpose Entities
429. In order to maintain favorable credit ratings, inter alia, Enron management and its
bankers developed a scheme to keep loans, obtained through partnerships and SPEs, off Enron's
financial statements and at the same time inappropriately record income from transactions with these
SPEs. Enron entered into arrangements with affiliates that Enron controlled and Enron financed.
In violation of GAAP, Enron failed to consolidate the entities into its financial statements.
part:
430. GAAP, as set forth in Accounting Research Bulletin ("ARB") No. 51, 1, states in
There is a presumption that consolidated statements are more meaningful than
separate statements and that they are usually necessary for a fair presentation when
one of the companies in the group directly or indirectly has a controlling financial
interest in the other companies.
431. FASB Statement of Financial Accounting Standards ("SFAS") No. 94, requires
consolidation of all majority-owned subsidiaries unless control is temporary or does not rest with
the majority owner.
432. GAAP also provides that, under very limited circumstances, certain qualifying SPEs
do not have to be consolidated. But in order to even qualify as an SPE, and in turn, avoid
consolidation, a public company's investment entity must meet very specific criteria under SFAS No.
125. For example, the SPE must have standing apart from the transferor (Enron) and the transferor
can not maintain effective control over the transferred assets. SFAS No. 125, 9c, 26.
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