Enron Accounting Fault Essay

Enron is frequently given as an display case of creative news report. It is also given as a good example of accounting fraud and insider trading. This is a good example of creative accounting postulaten too far not umpteen would take issue that it was accounting fraud, although some would say they were just unlucky to get caught. after all, the auditors were Arthur Anderson, at the time angiotensin converting enzyme of the most respected auditing firms.Creative Accounting Example 1 Creating multiple trading entities The creative accounting involved setting up other entities and then trading with these entities.This is a common practice many businesses divide their operations into sectors that perform specialist functions and then trade is carried out between these various entities. However, linguistic rule applicable accounting standards (GAAP), would require that some sort of financial consolidation is performed and the full picture reported.However, in that respect was a bias to record income, revenue, and profits from transactions with these entities rather than costs, expenses, and losses.Creative Accounting Example 2 Moving business segments offshore Enron created these entities offshore. This is also a common practice in accounting and tax income planning. Many businesses do this to reduce the amount of taxes they pay, this can be done legally (tax avoidance) and it can take illegal forms (tax evasion).Offshore entities usually enjoy an enhanced level of privacy, this can make it difficult for local governments and auditors to gain insights into what is way out on. Enron appears to have manged to succeed for a long time in hiding what was going on from both auditors, investors, and potential whistle-blowers.If Enron was recording profits, and assuming not much else was happening in these other entities, then these offshore entities would be recording losses. These losses were conveniently recorded away from the financial statements and an d so investors and many staff never new about them.Creative Accounting and Insider Trading The executives didnt break away here. By using creative accounting and fraud to manipulate profits, they were able to affect the stock price, the attached logical and illegal step was to start to trade the stock to benefit from the inside have intercourseledge they had. This is know as insider trading and is illegal in most countries.