Enron: did the financial reporting model really fail?

• Published in: Commercial Lending Review 2003-03, Vol.18 (2), p.5
• Main Authors: Barsky, Noah P, Catanach, Jr., Anthony H, Rhoades-Catanach, Shelley C, Thibodeau, Jay C
• Format: Article
• Language: English
• Subjects: Accountants; Accounting; Analysis; Business failures; Business metrics; Cash flow; Corporate profits; Disclosure; Earnings per share; Energy industry; Ethical aspects; Financial analysis; Financial disclosure; Financial performance; Financial reporting; Financial statements; GAAP; Gas transmission industry; Influence; Information professionals; Institutional investments; Profit margins; Ratios; Reforms; Scandals; Stock prices
• ISSN: 0886-8204

Enron's recent collapse is considered by many to be a classic accounting failure characterized by the inappropriate use of generally accepted accounting principles (GAAP) and questionable independent auditor performance. Enron's demise has resulted in a renewed call for the major reform of GAAP and the process by which accounting and reporting standards are created. Although the US Congress has quickly reacted to recent financial disclosure and auditing irregularities by enacting corporate oversight legislation (Sarbanes-Oxley Act of 2002), it remains unclear whether the current US financial reporting model needs a major overhaul. Many believe that additional corporate disclosures might have prevented the Enron fiasco. To provide insight into what additional disclosures might be needed, it is useful to examine just how the current US financial reporting model failed the markets in the Enron debacle.