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

What made it all work, Dickson said, was a form of accounting in which
the company counted future projected earnings as current income. "It as huge
amounts of money that covered up those cash outlays," he said.
543. Enron had no legitimate basis for the $44 million figure and the assumptions used to
arrive at that figure were not supportable. Indeed, the projected savings promised to customers,
along with EES's profits based on estimated savings, were not being realized. However, because
these deals were commoditized, utilizing unrealistic projections and accounted for by inappropriately
using mark-to-market, Enron was able to improperly book huge, illusory profits up-front on the Lilly
contract and many other EES deals.
544. Additional ESS contracts that improperly accelerated revenue include the Enron DSM
contract with J.C. Penney, that had losses of $60 million, the IBM deal, which was a significant loss
for Enron from the outset, and the CitiGroup contract, which was known at its inception to cost
Enron millions in losses. Additionally, in a 4thQ 99 EES deal with Owens Illinois, EES recognized
a multi-million dollar profit when the deal closed, even though it was known this deal would lose
money for EES. In fact, it is impractical or impossible for Enron to estimate profitability on energy
contracts extending beyond four years because of the variability in all the factors related to these
contracts. However, this variability is what allowed Enron to manipulate their assumptions to
achieve a predetermined, but unreachable profit level and then record the associated and equally
unreasonable revenues by improperly employing mark-to-market accounting.
545. Enron violated GAAP by improperly recognizing revenues up-front on EES contracts
when among other things, it had no historical basis that would allow it to make reasonable estimates
of future income streams and the contracts were highly speculative, with indeterminate outcomes.
- 370 -