Managing/Manipulating the Numbers - Assignment Example

The Enron Debacle The higher management at well known Enron Corp. never looked concerned or disrupted with how people of the world looked at their business applications, although no one would have thought of such a shocking conclusion for the nation's chief and most inventive energy dealer. At least on the face of it, Enron's off-balance-sheet manipulation barely seems the stuff that would cavern a corporate organization this huge. (“The Enron Debacle” 2). As a result of the practices followed by the company, the shareholders lost almost $11 billion when the share price of the Enron's stock, which has gained a high of US$90 per share in the middle of 2000, crashed down to below $1 at the end of 2001. George J. Benston in his book describes the value of the assets of Enron, which at that time stood at a staggering $63.

4 billion, framed it as the major corporate bankruptcy in the history of U.S. until WorldCom next year came up to take its place (10). The actions of the company and the consequences In light of the normal business practices, Enron as well as other energy suppliers earned income by providing services which included general trading as well as management of risks together with constructing and maintaining the power plants, pipelines for natural gas, processing and storage facilities. When taking the peril of trading products, businessmen are permissible to account for the selling price as income or sales and the cost of the merchandise as cost of goods sold.

On the contrary, when an "agent" is involved in the provision of a service to the consumer, he does not take the identical risks as one involved in trading. People involved in provision of services as agents are able to account for the selling and brokerage fees as their income, even though they are not allowed to record the whole value of the transaction. On the contrary, Enron chose to account for the whole value of each of its business transactions as income. During 5 years from 1996 to 2000, the revenues augmented by over 7.

5 times, going up from $13.3 billion in 1996 to $100.8 billion in 2000. At the same time, as the revenues of the company were towering from a low down $9.2 billion in 1995 to $100.8 billion in the start of the new millennium, its share price was also yielding 5 times during the same six-year tenure. This aggressive practice continued and even the overconfident managers overlooked the complaints of Wall Street's with impunity. Enron in the year 2000 was able to report revenues amounting to $138.

7 billion, which positioned the company among the top 6 on the Fortune Global 500. In the natural gas business of the company, the bookkeeping was fairly uncomplicated. In every period, the company accounted for the actual expenditure of provision of gas and actual income booked from selling it. The CEO of the company insisted that the business practice adopted for this business should be valued through mark-to-market accounting, citing that it would be able to characterize ". true economic value”.

After this practice, the company became the first non-financial corporate body to use the model of mark to market accounting for its complex long-standing agreements. Tony Mack