INTRODUCTION

Enron Corporation, was a Houston, Texas-based natural gas pipeline corporation established in 1985
by the merger of Houston Natural Gas and Inter North. The business had been embroiled in one of the
20th century's most devious economic scandals. Enron was actively involved in energy brokering,
electronic trading of oil, global commodities, and trading options, etc. Multitudes of the financial
reports submitted by the company have been found to be based on a systematic structure that can be
boiled down to mere accounting fraud. Enron was questioned several times over the course of the
1990s about his relationship with the accounting firm Arthur Anderson. It brought to light
controversial accounting methods and many suspected that the stench of fraud lingered around the
business.

Enron's stock price during the profitable years was above $90 per share. Nevertheless, in an instant
the scandal which was finally exposed collapsed the company (Bottiglieri, Reville, and Grunewald 1).
The stock closed at its ultimate low of 26 cents a share on November 30, 2001. In fact, on 2 December
2001, Enron was holding the imminent bankruptcy announcement.

Apart from the failure of external auditors and internal corporate supervision, many analysts claimed
the federal government should also bear some blame for the situation. In political contributions,
legislators in both the legislative and executive branches accepted millions of dollars from Enron
during the time when the federal government wanted to deregulate the energy sector, eliminating
nearly all regulatory controls.

Kenneth Lay, Enron's chairman, has above all fostered the value of high stock prices. He forced
workers into concentrating on increasing return rates by trading assets and borrowing more capital.
An asset-free balance sheet meant that new capital could come in and make the market believe the
business was incredibly profitable (Tonge, Greer, Lawton 6). Lay essentially started the craze for high
earnings, an obsession that cost his life for his business. In the end, it was the position of Lay that set
Enron's downfall in motion.
HISTORY

In 1985, Enron Corporation was formed through a merger between Inter North Inc. and Houston
Natural Gas (HNG). Kenneth Lay has at the same time been Enron's CEO and Chairman. Enron
Corporation is a multinational cash, infrastructure, and commodity corporation headquartered in
Houston, Texas. Enron Corporation has the 2nd largest pipeline network in the U.S., about 36,000
miles at the time, according to Michael Frontain (2017).

In fact, Enron Corporation is widely known as an innovator and a non-fear company. Not only is
Enron one of the largest integrated natural gas and electricity, it also provides renewable energy from
solar and wind. Besides that, Enron developed some innovative trading products as well. Enron was
called by Fortune in 1995 "America's Most Innovative Corporation," and he went on to win this award
for the next six years.

Jeffery Skilling joined Enron in 1990, and in 1997 he was made CEO of Enron. He has modified the
accounting system from conventional to mark-to-market. Andrew Fastow had promoted to become
Enron Corporation's CFO in 1998. Enron gained $100 million in gross sales in 2000, Enron's shares
are significantly increased and hit the highest of all time, $90.56, and it has been the 7th on the list of
Fortune 500 companies. In addition, Enron Corporation has an employees of about 21,000.

According to Lucian & Cristina, August 16, 2001, Enron Corporation is revealing and reporting a loss
of $618 million and a write-off of $1.2 billion, contributing to Enron falls' stock at $33.84.Securities
and Exchange Commission (SEC) is conducting an inquiry into Enron after 6 days of announcement,
August 22. Enron Corporation has acknowledged on November 2 that it has done a fake report, since
1997 it has overstated the income by about $586 million. Enron Corporation's auditor company,
Arthur Andersen, was one of SEC 's investigative targets, when the Securities and Exchange
Commission (SEC) began widening the inquiry. Enron files for US Bankruptcy Code Chapter 11
bankruptcy on December 2nd, 2001, and its stocks were closed at $0.26.

https://www.britannica.com/event/Enron-scandal
TECHNIQUES USED TO CONDUCT EARNING MANAGEMENT/ CREATIVE
ACCOUNTING

Earnings management can be described as decision taking and reporting on fair and legal management
designed to achieve stable and predictable financial outcomes. Besides that, Earnings management is
an accounting policy manager's preference in order to accomplish a particular objective. So, it is not
shocking that the management of the organization has an interest in how they are published. The
business manager needs to consider the implications of the financial reports they reported so that they
can make the right decision on the company's behalf.

Enron company gained income by offering services such as commodity trading and risk control as
well as constructing and maintaining electric power plants, natural gas pipelines, storage and
processing facilities. When taking the risk of purchasing and selling items, merchants are allowed to
disclose the sale price as sales and the cost of the products as the cost of the goods being sold. In
comparison, a "client" offers a consumer service, but does not take the same risks for purchasing and
selling as retailers do. Service providers are required to disclose trading and brokerage fees as income
when listed as agents, even if not for the full value of the transaction.

Although trading companies such as Goldman Sachs and Merrill Lynch used the traditional "agent
model" to report revenue (where only the selling or brokerage fees would be listed as revenue), Enron
then preferred to report the full value of each of its trades as revenue. In accounting definition this
"merchant model" approach was considered much more militant than the agent model. Enron's
practice of recording excessive income from trading was later adopted by other firms in the energy
trading sector in an effort to remain competitive with the company's massive revenue rise.

Enron's prices grew by more than 750 percent between 1996 and 2000, rising from $13.3 billion in
1996 to $100.8 billion in 2000. This massive expansion of 65 percent per year was unparalleled in any
sector, including the energy industry that usually considered growth to be respectable by 2-3 percent
per annum. Enron posted sales of $138.7 billion only for the first nine months of 2001.

The accounting had been relatively straightforward in Enron's natural gas business: the company
reported the actual costs of purchasing the gas and the actual profits from selling it at each time span.
When Skilling joined the firm, however, he requested that the trading company implement mark-to -
market accounting, citing that it would represent "... true economic value." Enron was the first non-
financial company to use the tool to compensate for its long-term, complicated contracts. Mark-to -
market accounting allows profits to be calculated as the present value of net potential cash flows after
a long-term contract has been concluded. The sustainability of these contracts and their related costs
were also hard to determine.
Investors were usually issued inaccurate or misleading reports because of the broad gaps in trying to
balance profits and cash. Income from projects could be reported when using the system, this
improved financial returns. However, the gains could not be used in future years, and there was a need
to provide new and additional income from more ventures in order to generate further growth to
appease investors. As one Enron challenger pointed out, "If you're raising your profits, you're going to
have to keep making more and more deals to make the same or raise profit." The U.S., in the midst of
possible risks On 30 January 1992, the Securities and Exchange Commission (SEC) approved Enron's
accounting scheme in its trading of natural gas futures contracts.. Later, however, Enron extended its
usage to other places within the organization to help it achieve expectations on Wall Street.

Enron and Blockbuster Video concluded a 20-year deal in July 2000 for one contract to bring on-
demand entertainment to different U.S. cities by year-end. Enron has acknowledged gross income of
more than $110 million from the transaction after many pilot projects, while critics challenged the
service's technological feasibility and customer demand. Blockbuster pulled out of contract when the
network failed to operate. Even though the transaction ended in a loss, Enron continued to expect
potential income.

The first big scam operation was the obvious use of SPEs by Enron executives in deceiving
shareholders and enriching themselves. To arrange transactions, Enron used around 500 these SPEs
and thousands of other problematic agreements to obtain off-balance sheet treatment of assets and
liabilities. Despite its considerable debt burden, Enron needed additional capital during the 1990s to
continue its growth. It was unattractive to fund new investments by either issuing additional debt or
raising cash, as such funding would dilute earnings per share. Hence, it used SPEs to borrow funds
directly from outside borrowers, also offering its own guarantees of credit and stock. The use of these
SPEs covered many areas of Enron's business: synthetic lease transactions; sales to SPEs of "capital
assets" (i.e., debt or equity interests held by Enron); selling of Enron stock and contracts to "hedge"
SPEs in exchange for Enron stock; and transfers of other assets to companies that had little outside
equity.

The unauthorized reporting of a note receivable from Enron's equity partners in various limited
partnerships was a second dubious accounting transaction. These notes were the obvious
commitments in the limited partnerships to pay for the equity claims, which Enron registered as assets
while GAAP allows subscribed equity to be reported as a counter-stockholders ' equity account, rather
than as a receivable document. Once accused of GAAP breaches, Enron announced that it would
restate the previous 4 1/2 years of financial statements by reporting a $1.2 billion reduction in
stockholders ' equity, modifying its income statements and balance sheets for the unconsolidated
SPEs, and making planned audit changes and reclassifications that were previously deemed
immaterial prior to the era.
References

 Scribd. (n.d.). Enron - Answer 2011 | Mark To Market Accounting | Equity (Finance).
[online] Available at: https://www.scribd.com/doc/54589803/Enron-Answer-2011 [Accessed
11 Aug. 2020].
 Bondarenko, P. (2018). Enron scandal | United States history. In: Encyclopædia Britannica.
[online] Available at: https://www.britannica.com/event/Enron-scandal.
 Investopedia. (2019). Enron. [online] Available at:
https://www.investopedia.com/terms/e/enron.asp.
 Coursehero.com. (2020). [online] Available at:
https://www.coursehero.com/file/8260693/Enron-scandal/ [Accessed 11 Aug. 2020].