MARK TO MARKET

TO HIDE FINANCIAL LOSESS

FOR EXAMPLE
ENRON WOULD BUILD A POWER PLANT AND IMMEDIATELY CLAMES THE PROJECTED
PROFITS ON ITS BOOKS IF THE BUSINESS REVENUE WAS LESS THAN ITS PROJECTED
ENRON TRANSFER IT TO THE LOSS OF BOOK CORPORATION WERE THE LOSS WENT
UNREPORTED AND MADE COMPANY MORE PORFITIBALE THAT IT WAS.

CFO ANDREW FASTOW USE SPECIAL PURPOSE ENTITIES (SPE) TO MAKE ENRON LOOK
PRODUCTIVE IN RETURN SPE INVESTORS WERE COMPENSATED WITH COMMON STOCK.
THE ANALYST WERE QUESTIONING ENRON’S TRANPARENCY BY APRIL OF 2001.

ENRON CLOSE ITS RAPTOR SPE TO AVOID DISTRIBUTING 58 MILLION SHARES IN OCTOBER
THEN CHANGE PENSION PLAN ADMINISTRATORS KEEPING EMPLOYEES FROM SHARING
THEIR SHARE FOR 30 DAYS.

THAT IS WHEN THE SUC STARTED INVESTIGATING AND ENROL REVEAL THAT THE
COMPANY HAS 591 MILLION IN LOSSES AND 628 MILLION IN DEBT

ENRON’S COLLAPSE LED TO THE SARBANES-OXLET ACT WHICH TIGHTENS DISCLOSURE

AND DECREASE PENALTIES FOR FINANCIAL MANIPULATION. IT PROMPTED THE
FINANCIAL ACCOUNTING STANDARDS TO RAISE ITS ETHCIAL CONDCUT STANDARDS AND
BOARDS OF DIRECTORS BECAME MORE INDEPENDENT IN HOW THEY MONITOR
COMPANYS

● Enron Corporation was founded in 1985 as a result of a merger between Houston Natural Gas
Corporation and InterNorth Inc. Enron soon became one of the largest suppliers of natural gas and
electricity.
● the firm was widely regarded as one of the most innovative, fastest growing, and best managed
businesses in the United States.
●
● In 2000, the business started to crumble. CEO Jeffrey Skilling concealed all financial losses resulting
from the trading business and broadband projects by applying the accounting concept of mark-to-
market accounting. The company kept building assets. It reported profits that were yet to be earned. If
the actual profit earned were less than the reported earnings, the loss was never reported. Additionally,
the business transferred the asset to the off-the-books corporation. Like this, the corporation concealed
its losses
● To add to the agony, the chief financial officer of the business Andrew Fastow deliberately resorted to
the plan that displayed that the business was in good financial shape even though its subsidiaries lost
many investors’ money.
● On February 12, 2001, Jeffrey Skilling came in place of Kenneth as a chief executing officer. On August
14, 2001, Skilling abruptly resigned, and Kenneth took over the role again. Same period, the broadband
division of the business reported a massive loss of $137 million, and the market prices of stock fell to
$39.05 per share. In October, the CFO’s legal counsel instructed auditors to destroy the files of Enron
and asked to maintain only the utility or necessary information. The business reported a further loss of
$618 million and a write-off of $1.2 billion. The price of the stock deteriorated to $33.84.
● On October 22, the business got under a probe by the securities and exchange commission. With this
news, the stock of Enron further deteriorated and was reported at $20.75.
● In November 2001, the business, for the first time, admitted and made the revelation that it had inflated
its income levels by $586 million. Also that it has been doing so since 1997.
● On 2nd December 2001, the business filed for bankruptcy, and the stock prices ended up flat at $0.26 per
share
● On January 9, 2002, the justice department ordered a criminal proceeding against the business. On
January 15, 2002, the NYSE suspended Enron, and the accounting firm, along with Arthur Andersen,
was convicted of obstruction of justice.
● One of Skilling’s early contributions was to transition Enron’s accounting from a traditional historical
cost accounting method to a mark-to-market (MTM) accounting method, for which the company
received official U.S. Securities and Exchange Commission (SEC) approval in 1992.6
● MTM is a measure of the fair value of accounts that can change over time, such as assets and liabilities.
MTM aims to provide a realistic appraisal of an institution’s or company’s current financial situation,
and it is a legitimate and widely used practice. However, in some cases, the method can be manipulated,
since MTM is not based on “actual” cost but on “fair value,” which is harder to pin down.7 Some
believe MTM was the beginning of the end for Enron, as it essentially permitted the organization to log
estimated profits as actual profits.
● It is not unusual for businesses to fail after making bad or ill-timed investments. What turned the Enron
case into a major financial scandal was the company's response to its problems. Rather than disclose its
true condition to public investors, as the law requires, Enron falsified its accounts. It assigned business
losses and near-worthless assets to unconsolidated partnerships and "special purpose entities." In other
words, the firm's public accounting statements pretended that losses were occurring not to Enron, but to
the so-called Raptor entities, which were ostensibly independent firms that had agreed to absorb Enron's
losses, but were in fact accounting contrivances created and entirely controlled by Enron's management.
In addition, Enron appears to have disguised bank loans as energy derivatives trades to conceal the
extent of its indebtedness.
● When these accounting fictions -- which were sustained for nearly 18 months -- came to light, and
corrected accounting statements were issued, over 80% of the profits reported since 2000 vanished and
Enron quickly collapsed. The sudden collapse of such a large corporation, and the accompanying losses
of jobs, investor wealth, and market confidence, suggested that there were serious flaws in the U.S.
system of securities regulation, which is based on the full and accurate disclosure of all financial
information that market participants need to make informed investment decisions. The suggestion was
amply confirmed by the succession of major corporate accounting scandals that followed.
● Federal securities law requires that the accounting statements of publicly traded corporations be certified
by an independent auditor. Enron's auditor, Arthur Andersen, not only turned a blind eye to improper
accounting practices, but was actively involved in devising complex financial structures and transactions
that facilitated deception.
● The company filed for bankruptcy in 2001 after revised Securities Exchange Commission filings and a
failed merger brought most of the company’s fraud to light. The company’s former CEO was charged
with conspiracy and securities fraud among other charges.

The Sarbanes-Oxley Act

The SOX Act was created to restore public trust in corporations following the corporate accounting scandals
that made names such as Enron synonymous with corporate malfeasance.

● Improved financial reporting: A 10-year retrospective study published in 2014 suggested that the SOX
Act may have improved the quality of financial reporting.5
● Lower risk of fraud and financial scandals: Research in 2017 revealed that the SOX Act acts as an
"early-warning system" for corporations that can help reveal fraud because weak internal controls are
linked with hidden fraud.6 The strict financial reporting requirements of the Sarbanes-Oxley Act can
improve internal controls and thereby help companies identify fraud or similar corrupt activities and stop
them before they lead to an Enron-like scandal that can be financially ruinous to the company and its
investors.
● The problems began surfacing in 2001 when analysts started looking into Enron's financial
statements. In the third quarter of 2001, Enron announced a $638 million loss and a $1.2 billion
reduction in shareholders' equity. We can infer that Enron was hiding over a billion dollars of debt on
their financial statements. After the announcement, the Securities and Exchange Commission (SEC)
began investigating all transactions between Enron and the SPVs.
● As the accounting issues began surfacing, representatives from Enron's accounting firm began
destroying documents related to Enron's finances.
● When the scandal surfaced and Enron collapsed, $74 billion of shareholder funds, pensions, and the jobs
of thousands of employees were gone.
● The FBI also began investigating the case. Due to the case's large volume, a multi-agency task force of
investigators, analysts, the Internal Revenue Service Investigation Division, the SEC, and prosecutors
were created and termed the 'Enron Task Force'.
● Thousands of interviews were conducted, thousands of boxes of evidence were seized, twenty-two
people were convicted and more than $164 million was seized to compensate victims of the Enron
scandal.
● The Enron scandal did, eventually, lead to new regulations in the financial system. In July 2002 the
Sarbanes-Oxley Act was signed, which increased penalties for the destruction and fabrication
of financial statements, in addition to attempts by tricking stakeholders. The scandal also led to new
compliance measures, such as the Financial Accounting Standards Board (FASB) increasing the
importance of ethical conduct. Company directors have also become more independent, decreasing the
chance of them trying to manipulate profit and hide debt. Independent directors monitor the audit
companies and have the power to replace unethical managers.
● These new measures are important to keep in place in order to prevent future financial and accounting
scandals in large companies.