Should the Regulators, Specifically the Financial Accounting Standards Board,
Be Blamed for the Enron Debacle?
by Jennifer Prashad
Abstract
Enron's use of Special Purpose Entities (SPEs) and Mark-to-Market (MTM) accounting methods to deceive investors resulted in tremendous public and regulatory scrutiny. Given the complexities that exist in the market place, the accounting guidance available is often limited and far too complicated for management to follow. In addition, some of the guidance clearly provided loopholes to allow Enron's schemes to go undetected until it was too late. Regulators' responses to innovative and creative accounting methods are often slow and politically motivated, placing the public at financial risk. This research paper examines the changes enacted by the regulators, specifically the Financial Accounting Standards Board (FASB), to determine if it contributed to Enron's demise. It focuses on Enron's use of the SPEs and the MTM accounting methods to disguise the transparency of its financial statements.
Right after the horrifying terrorist attacks on the United States in 2001, the country was once again thrust into another crisis. One of the largest corporations in the U.S., Enron, announced that it was reviewing its financial statements for what it termed "accounting errors". Within weeks the company declared bankruptcy. Investors and creditors saw their shares in Enron disappear overnight. According to The New York Times , shareholder losses were estimated at $60 billion (Editorial Desk, 2002). In addition, approximately 4,500 employees saw their retirement packages disappear and their careers ended. Enron had been named one of the top corporations in the United States and was often viewed as a model for others. Unknown to its investors and creditors, the company had achieved this status based on aggressive and sometimes deceptive accounting methods. In some cases, Enron's accounting methods were either approved by regulators or they were aware of its use by the company. In other cases, Enron's accounting methods completely disregarded the Generally Accepted Accounting Principles (GAAP) set forth by the Financial Accounting Standards Board (FASB).
The corporate scandals of 2001 brought to light the corrupt accounting practices of some of the biggest firms in the United States. Most of the blame was placed on the auditors and accountants responsible for the financial statements. It is important for financial statements to be clear because both investors and creditors rely on them in order to make sound business decisions. In order for financial statements to be used as a tool of measure, they must be compiled using set guidelines provided by the regulators and adapted by companies in the same industry.
Enron's use of Special Purpose Entities (SPEs) and Mark-to-Market (MTM) accounting methods provided two avenues that cloaked the true financial status of the corporation by "use and abuse of accounting rules" (Van Neil, 2004, p. 14). MTM is an aggressive accounting method that allows companies to record revenues as earned before the services are provided. Accounting students are taught that the discipline relies on conservatism and that conservative accounting methods record revenue after services have been provided. However, conservatism appeared to be an unheard of principle by Enron, as its fraudulent activities portrayed.