Enron Case:
Enron is known for the world’s biggest scandal in the history of American business. In Dec 2001, Enron Corp filed for bankruptcy. The major factors that led to the dissolution of Enron Corporation are the shortfall of business ethics of Enron’s management, accountants, auditors, board of directors and consultants.

Off balance sheet arrangements made transactions between Enron and its partners were not clear and transparent. Between 1993 and 2001, Enron created over 3,000 SPEs that resulted in the overstatement of Shareholders’ Equity by $1.2 billion. This increased the size of loan portfolio of Enron without a corresponding increase in share capital. Securitization was not treated as financing vehicle and no adjustments to leverage ratios were made then.

Enron violated US GAAP and recorded inappropriate capital stock transaction. Common stocks issued to SPE were accounted as notes receivable. GAAP doesn’t allow this transaction unless cash is received. This puffed up Stockholders’ equity by 8.5% or by $1 billion in 2001.

Enron used its own common stocks to capitalize SPEs to satisfy US GAAP. When Enron shares went down certain partnerships had to invest just enough allow SPEs not to be consolidated into Enron’s Financial statement. Enron had to transfer additional shares to SPE, Rapto, in a futile effort to support.

Enron recognized revenues due to increase in stock price on stocks held in SPE. Anderson accounting firm formulated a mechanism to record gains in stock price but not losses and US GAAP equity method was misused. Mark to Market (MTM) accounting applied to no active market for financial instruments but used estimates regarding fair value of long term contracts. Enron controlled the market and used its own valuation. Accounting disclosures in foot notes in financial statements were brief instead of substance. Enron management and