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

Enron's improper accounting of the CRRA loan resulted in an overstatement of revenues and
earnings before taxes due to booking contracts worth approximately $220 million.
574. The accounting for these transactions violated GAAP which requires that financial
statements represent the true nature of transactions. See FASB Statement of Concepts No. 2, 78.
H. Enron Violated GAAP in Accounting for
Long-Term Construction Contracts
575. Enron used non-recourse debt to finance a wide array of its plant building projects
over the years. By using non-recourse debt, Enron relied on a variety of contracts with an assortment
of third parties, as well as the tax benefits of the underlying assets, to establish a reliable cash flow
that would support the financing. These contracts, rather than the general credit of Enron and other
owners, provided the credit for the financing. In fact, the lenders typically agreed not to seek
repayment of the debt by Enron and the other owners, who would have no liabilities except to the
extent of any obligations Enron and the owners undertook pursuant to any project contracts, such as
operating agreements and throughput contracts. Enron, as the owner of the project, could achieve
off-balance-sheet (non-consolidation) accounting only if the debt was non-recourse to it and it owned
50% or less of voting control.
576. By accounting for these projects on a non-consolidated basis, Enron International, a
subsidiary of Enron, could recognize as revenue, approximately 5% of contract value for
construction services provided to Enron.
577. However, according to former employees, to inflate reported revenues, Enron
International improperly recognized revenue in connection with many of these projects, by
recognizing 10% of the construction services contract value as revenue upon signing. Some of the
projects identified include, but are not limited to:
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