Enron

Enron

In a quest to maximize profits, Enron committed accounting fraud while trying to secure its position as the energy leader throughout the world. In the early 1990’s mark-to-market accounting practices became a part of the Generally Accepted Accounting Principles; however, the standard guidelines for assigning an immediate profit on the future value of an asset facilitated Enron to find ways to use the accounting method to commit fraud (Hamilton, 2014). In addition to the corrupt mark-to-market accounting practices, Enron used the controversial special purpose vehicle as a means to omit many unique debt-laden structures from the company’s balance sheet while misleading investors about the total sum of debt the company was holding (Hamilton, 2014). During the late 1990’s Enron became the gold standard for its innovative business model and talented management team because of investor demand for the company’s stock.

In 1990, Enron’s stock price was seven dollars a share and increased throughout the decade to over eighty dollars per share (Catanach & Catanach-Rhoades, 2003). The annual financial statements throughout the 1990’s that depicted continuous earning increases and increases in operating performance fueled the investor demand for Enron stock. Financial analysts use numerous methods to evaluate the performance of a business, including the DuPont System of Financial Analysis (Catanach & Catanach-Rhoades, 2003). This model uses asset turnover, profit margin, and leverage ratios to analyze how effectively managers are making decisions that produce a return on equity. When all three ratios are increased, it demonstrates an enhanced management of an organizations assets, profit margins, and financing, which adds to an overall increase in return on equity (Mowen, Hansen, & Heitger, 2014, 2012, p. 528). According to table one, Enron’s return on equity decreased to single digits after 1996; however, the asset turnover and leverage ratios did not increase...