The collapse of Enron was entirely related to the accounting practices adopted by the company. It is a number of these questionable, and in some cases straight out fraudulent, accounting practices that pertained to the most dramatic collapse of a major company in years. An analysis of some of these accounting practices brings to light the problems with the use of concepts such as mark-to-market accounting and the use of special purpose entity’s (SPE’s). To say that the collapse “seemed to be a thumb in the nose of the efficient market hypothesis (EMH)” is a statement misguided in the understanding of this concept. One can explain this through the fact that a number of the basic principals of the EMH were satisfied during the time of the Enron collapse. Furthermore, the interrelation of agency theory and EMH, suggests that the basic ideals surrounding agency theory also applied to the Enron Case at some point in time, however the continuation of this principal deteriorated as time went on.
Among a number of questionable and fraudulent accounting practices were two key concepts that hid the true value of the firm so it was not “readily apparent to anyone except a forensic accountant” (Sewer, 2002). These concepts were the use of Special purpose entities (SPE’s) and mark-to-market accounting. The reason to choose analysis of these concepts is that neither is fraudulent in itself, however its application in this case caused a review of these principals.
Enron’s use of special purpose entities has been one of the most widely discussed accounting issues of recent times. The use of special purpose entities is common amongst almost all, if not all organizations. A key problem with the way Enron had set up its SPE’s was that it ...