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

536. Because the use of mark-to-market accounting requires the ability to make reasonable
estimates of future income streams, longer term contracts such as Enron's introduced more
uncertainty into the estimate. The Enron Defendants improperly took full advantage of the fact that
contracts that exceed four years could result in a wide range of fair value estimates and thus provide
Enron with wide leeway in estimating the value of the contract. The Enron Defendants recorded
income from these contracts even though they realized that once the contracts began to be performed,
many would become losses because the cost, price and other assumptions were never valid to begin
with. To avoid recording losses when it started to look like a deal was about to unfold, Enron would
shift the curves – changed the estimate – to compensate for the anticipated loss, further misleading
the shareholders. A former employee noted, "shifting the curve and making new deals to bury the
losses from the past is constantly the strategy." Another former trader stated: "It was very simple.
You just tweaked the assumptions on different variables, which were changed to make the return
higher."
537. When Enron employed mark-to-market accounting, the Company calculated a range
of revenue and risk possibilities (i.e., a low revenue/low risk model, or a high revenue/high risk
model). Enron consistently chose the high revenue/high risk model for nearly every deal, but
because Enron moved debt, costs, losses, and liabilities off its balance sheet through SPEs, this
accumulation of risk was not disclosed to investors. For example, a former trader in Enron Global
Markets was directed by his boss in the 4thQ 00 to show an extra $2 million in trading revenues for
the quarter. To do this, they just increased the amount of money on an already booked deal for oil
to be delivered in the future using mark-to-market accounting. This was called "moving the curve."
This was altering the assumptions used to estimate income on contracts accounted for under mark-to-
market. Moving the curve projection just 1% could mean millions in extra income. This abusive
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