george soros pushed the idea of mark-to-market accounting for enron.
george soros pushed the idea of mark-to-market accounting for enron.
who pushed the idea of mark-to-market accounting for enron?
george soros
during 1999, enron initiated enrononline, an internet-based trading operation, which was used by virtually every energy company in the united states. enron president and chief operating officer jeffrey skilling began advocating a novel idea: the company didn't really need any "assets". by promoting the company's aggressive investment strategy, he helped make enron the biggest wholesaler of gas and electricity, trading over $27 billion per quarter. the corporation's financial claims, however, had to be accepted at face value. under skilling, enron adopted mark-to-market accounting, in which anticipated future profits from any deal were tabulated as if currently real. thus, enron could record gains from what over time might turn out to be losses, as the company's fiscal health became secondary to manipulating its stock price on wall street during the so-called tech boom. but when a company's success is measured by undocumented financial statements, actual balance sheets are inconvenient. indeed, enron's unscrupulous actions were often gambles to keep the deception going and so increase the stock price. an advancing price meant a continued infusion of investor capital on which debt-ridden enron in large part subsisted (much like a financial "pyramid" or "ponzi scheme"). attempting to maintain the illusion, skilling verbally attacked wall street analyst richard grubman, who questioned enron's unusual accounting practice during a recorded conference telephone call. when grubman complained that enron was the only company that could not release a balance sheet along with its earnings statements, skilling replied, "well, thank you very much, we appreciate that ... asshole." though the comment was met with dismay and astonishment by press and public, it became an inside joke among many enron employees, mocking grubman for his perceived meddling rather than skilling's offensiveness. when asked during his trial, skilling declared that industrial dominance and abuse was a global problem: "oh yes, yes sure, it is."
enron
in enron's natural gas business, the accounting had been fairly straightforward: in each time period, the company listed actual costs of supplying the gas and actual revenues received from selling it. however, when skilling joined the company, he demanded that the trading business adopt mark-to-market accounting, claiming that it would represent "true economic value." enron became the first nonfinancial company to use the method to account for its complex long-term contracts. mark-to-market accounting requires that once a long-term contract has been signed, income is estimated as the present value of net future cash flow. often, the viability of these contracts and their related costs were difficult to estimate. owing to the large discrepancies between reported profits and cash, investors were typically given false or misleading reports. under this method, income from projects could be recorded, although the firm might never have received the money, with this income increasing financial earnings on the books. however, because in future years the profits could not be included, new and additional income had to be included from more projects to develop additional growth to appease investors. as one enron competitor stated, "if you accelerate your income, then you have to keep doing more and more deals to show the same or rising income." despite potential pitfalls, the u.s. securities and exchange commission (sec) approved the accounting method for enron in its trading of natural gas futures contracts on january 30, 1992. however, enron later expanded its use to other areas in the company to help it meet wall street projections.
enron scandal