![Fair-value accounting: A cautionary tale from Enron [An article from: Journal of Accounting and Public Policy]](https://www.ebooknetworking.net/books/B00/0P6/bigB000P6NX44.jpg)
Fair-value accounting: A cautionary tale from Enron [An article from: Journal of Accounting and Public Policy]
Book Details
Author(s)G.J. Benston
PublisherElsevier
ISBN / ASINB000P6NX44
ISBN-13978B000P6NX44
AvailabilityAvailable for download now
Sales Rank12,421,308
MarketplaceUnited States 🇺🇸
Description
This digital document is a journal article from Journal of Accounting and Public Policy, published by Elsevier in 2006. The article is delivered in HTML format and is available in your Amazon.com Media Library immediately after purchase. You can view it with any web browser.
Description:
The FASB's 2004 Exposure Draft, Fair-Value Measurements, would have companies determine fair values by reference to market prices on the same assets (level 1), similar assets (level 2) and, where these prices are not available or appropriate, present value and other internally generated estimated values (level 3). Enron extensively used level three estimates and, in some instances, level 2 estimates, for its external and internal reporting. A description of it's use and misuse of fair-value accounting should provide some insights into the problems that auditors and financial statement users might face when companies use level 2 and, more importantly, level 3 fair valuations. Enron first used level 3 fair-value accounting for energy contracts, then for trading activities generally and undertakings designated as ''merchant'' investments. Simultaneously, these fair values were used to evaluate and compensate senior employees. Enron's accountants (with Andersen's approval) used accounting devices to report cash flow from operations rather than financing and to otherwise cover up fair-value overstatements and losses on projects undertaken by managers whose compensation was based on fair values. Based on a chronologically ordered analysis of its activities and investments, I believe that Enron's use of fair-value accounting is substantially responsible for its demise.
Description:
The FASB's 2004 Exposure Draft, Fair-Value Measurements, would have companies determine fair values by reference to market prices on the same assets (level 1), similar assets (level 2) and, where these prices are not available or appropriate, present value and other internally generated estimated values (level 3). Enron extensively used level three estimates and, in some instances, level 2 estimates, for its external and internal reporting. A description of it's use and misuse of fair-value accounting should provide some insights into the problems that auditors and financial statement users might face when companies use level 2 and, more importantly, level 3 fair valuations. Enron first used level 3 fair-value accounting for energy contracts, then for trading activities generally and undertakings designated as ''merchant'' investments. Simultaneously, these fair values were used to evaluate and compensate senior employees. Enron's accountants (with Andersen's approval) used accounting devices to report cash flow from operations rather than financing and to otherwise cover up fair-value overstatements and losses on projects undertaken by managers whose compensation was based on fair values. Based on a chronologically ordered analysis of its activities and investments, I believe that Enron's use of fair-value accounting is substantially responsible for its demise.
