Another accounting gap, which was discovered from the Enron's balance sheet, was the recording of the note receivable as an asset. These were the promises to pay the equity claim in the limited partnerships, which Enron recorded as assets even though GAAP requires subscribed equity to be reported as a contra-stockholders' equity account, rather than as a note receivable. Once it was accused of GAAP violations, Enron announced it would restate the previous 4 As years of financial statements by recording a $1.2 billion reduction in stockholders' equity, adjusting its income statements and balance sheets for the unconsolidated SPEs, and making prior-period proposed audit adjustments and reclassifications that had originally been considered as immaterial. Enron's restatement reduced previously reported net income by $569 million and reduced shareholders' equity by $1.2 billion.
Shortly after these announcements, several rating agencies lowered Enron's long-term debt to below-investment grade, and Dynegy terminated its proposed merger agreement with Enron. In December 2001, Enron filed for Chapter 11 bankruptcy protection.
Charles Mulford, co-author of The Financial Numbers Game, says, "the accounting model isn't broken, financial reporting just needs some tweaks." The Enron used the most common off balance sheet financing technique. ...Show more