![]() ![]() And where were the outside auditors in all this? Arthur Anderson, the accounting firm hired by Enron to audit the annual financial statements, also held large consulting contracts with the company that impaired its independence and ultimately resulted in a clean audit opinion. Even so, Enron accountants managed to record a profit of over $100 million by reporting a deal with Blockbuster that, in reality, never produced a single dollar of revenue.Įven as Enron secretly plunged toward bankruptcy, the stock rose 56 percent in 1999 and another 87 percent in 2000. In retrospect, analysts estimate that Enron lost over $1 billion in its broadband venture. The supply of fiber optic capacity far exceeded demand and prices were actually dropping around the country. For the most part, mark-to-market revenue recognition was used by investment firms in order to adjust securities from cost to current market value, but Enron was using the practice to report revenues that hadn’t even been earned yet.įor instance, in January 2000 Enron announced its entry into the broadband fiber optic business, citing this move as a natural extension of the company’s services. In order to hide the reality of the failing commodities trading from investors and creditors, Enron creatively adopted accounting practices from other industries, all GAAP compliant, such as mark-to-market accounting. The going concern assumption under GAAP presumes that the economic entity will remain in operation for the foreseeable future and has no plans to wrap up operations, because an entity that is going bankrupt or is contemplating ending operations is probably not a good investment. That’s the second underlying assumption of GAAP-that the entity being observed is a going concern. ![]() It’s also important to know if the business as reported is a viable entity, and not just something temporary. ![]() That’s why it’s important, when looking at financial accounting information, to know exactly the scope of the information to know which business entities are included and which are not. With a small business, like a sole proprietor, the boundaries of the entity are fairly clear, but as a business grows and acquires new assets and even whole entities, the lines can become blurred. The new company had the second largest pipeline network in the United States with over 36,000 miles of pipe stretching across the continent and north into Canada. However by 1986 Segnar had retired, Kenneth Lay was chairman and CEO, and the company was renamed Enron with corporate headquarters in Houston. The arrangement stipulated that the merged entities would be known as HNG/InterNorth and be headquartered in Omaha with Segnar as chairman and CEO. When InterNorth, with one of the nation's premier pipeline networks with revenues of $7.5 billion in 1984, found itself the potential takeover target of corporate raiders, CEO Sam Segnar sought to buy out HNG, and a deal was announced in May 1985 in which InterNorth would acquire HNG for $2.4 billion. InterNorth began as Northern Natural Gas Company, organized in Omaha, Nebraska, in 1930. By 1984 HNG had assets of $3.7 billion, sales of over $2 billion, and profits of $123 million. In 1976 it sold its retail gas business in Houston to concentrate on gas exploration and production and other businesses. in the 1920s and provided gas to retail customers in Houston. a favorable location, and increasing reputation of the concern will remain unrecorded though these are valuable assets.Enron started out as a legitimate business in 1985 when two relatively small pipeline companies, HNG and InterNorth, merged into one. Historical Cost PrincipleĪccording to Historical Cost principle, an asset is ordinarily recorded in the accounting records at the price paid to acquire it at the time of its acquisition and the cost becomes the basis for the accounts during the period of acquisition and subsequent accounting periods.Īccordingly, if nothing is paid to acquire an asset the same will not be usually recorded as an asset, e.g. In an agency relationship, the revenue is the amount of commission and not the gross inflow of cash, receivables or other considerations. It excludes the amount collected on behalf of third parties such as certain taxes. Revenue is the gross inflow of cash, receivables or other considerations arising in the course of ordinary activities of an enterprise from the sale of goods, rendering of services and use of enterprise resources by others yielding interests, royalties, and dividends. ![]()
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