Latest Enron Lawsuit - Accusations of Failure to Record Expenses


 

Introduction

Enron has been sued in federal court with failure to record expenses for overseas projects. The result, according to the lawsuit, was an overstatement of income for the years 1993-1997. The charges state that Enron officials were warned that the expenses should be reported, but top management argued that overall corporate earnings would fall too low if the items were booked.

 

A Further Look

The latest in a series of lawsuits was filed against Enron in federal court this month. The allegations made in this charge focus on Enron's overseas operations, where the company is said to have failed to report expenses associated with various pipeline and power plant projects.

In its accounting for these projects, Enron engaged in something called "snowballing." Expenses associated with contracts on which Enron was bidding were written off against revenues if the firm successfully landed the contract, while expenses associated with unsuccessful contracts were to be written off immediately. By allegedly snowballing, Enron did not write off the expenses in the proper time period.

The lawsuit argues that Enron failed to properly account for expenses associated with these contracts. A group of accountants allegedly reported to Enron's top managers that expenses needed to be written off, but that they were told the firm's net income would fall too low if this was done and that analysts' predictions of earnings would not be met. Enron counters that it did nothing wrong and that the rules associated with the expenses constantly changed.

The allegation is made that Enron failed to write off expenses totaling more than $100 million for the period 1993-1997, thereby misstating income, but that the total expense was eventually written off in 1999.


Source

"Amended Suit Charges Enron with Avoiding Overseas Costs," The Wall Street Journal, by Kathryn Kranhold, April 9, 2002, p. B7.

Questions

Click here for Instructor Discussion Notes

1. What is the matching principle?

2. What is a contingency?

3. How can a firm justify that successful contracts should be accounted for differently than unsuccessful contracts?

4. Does it matter if the charges are true that Enron failed to report expenses in earlier years if the total expense was eventually reported?



 

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