2.2. “Merchant” investments
Enron also used fair-value accounting for its ‘‘merchant’’ investments–partnership interests and stock in untraded or thinly traded companies it started or in which it invested. As was the situation for the energy contracts, the fair values were not based on actual market prices, because no market prices existed for the merchant investments. Although the SEC and FASB require fair-value accounting for energy contracts, FAS 115 limits revaluations of securities to those traded on a recognized exchange and for which there were reliable share prices, and valuation increases in non-financial assets are not permitted. Enron (and possibly other corporations) used the following procedure to avoid these limitations. Enron incorporated major projects into subsidiaries, the stock of which it designated as ‘‘merchant’’ investments, and declared that it was in the investment company business, for which the AICPA’s Investment Company Guide applies. This Guide requires these companies to revalue financial assets held (presumably) for trading to fair values, even when these values are not determined from arm’s-length market transactions. In such instances, the values may be determined by discounted expected cash flow models, as are level 3 fair values.5 The models allowed Enron’s managers to manipulate net income by making “reasonable” assumptions that would give them the gains they wanted to record. (Some notable examples are provided below.)本文来自优.文,论-文·网原文请找腾讯324.9114
Enron chief accounting officer, Rick Causey, used revaluations of these investments to meet the earnings goals announced by Skilling and Enron’s CEO and Chairman of the Board, Kenneth Lay. “By the end of the decade,”McLean and Elkind (2003, p. 127) report, “some 35 percent of Enron’s assets were being given mark-to-market treatment.” When additional earnings were required, contracts were revisited and reinterpreted, if increases in their fair values could be recorded. However, recording of losses was delayed if any possibility existed that the investment might turn around.
项目可行性研究报告 An example is Mariner Energy, a privately owned Houston oil-and-gas company that did deepwater exploration in which Enron invested and which it bought out for $185 million in 1996. Enron’s accountants periodically marked-up its investment as needed to report increases in earnings until, by the second quarter 2001, it was on the books for $367.4 million. Analyses in the second and third quarters of 2001 by Enron’s Risk Assessment and Control department (RAC) that valued the investment at between $47 and $196 million did not result in accounting revaluations. After Enron’s bankruptcy, Mariner Energy was written down to $110.5 million.
2.3 Braveheart partnership with Blockbuster
In the fourth quarter 2000 EBS announced a 20-year project (Braveheart) with Blockbuster to broadcast movies on demand to television viewers. However, Enron did not have the technology to deliver the movies and Blockbuster did not have the rights to the movies to be broadcast. Nevertheless, as of December 31, 2000, Enron assigned a fair value of $125 million to its Braveheart investment and a profit of $53 million from increasing the investment to its fair value, even though no sales had been made. Enron recorded additional revenue of $53 million from the venture in the first quarter of 2001, although Blockbuster did not record any income from the venture and dissolved the partnership in March 2001. In October 2001 Enron had to announce publicly that it reversed the $110.9 million in profit it had earlier claimed, which contributed to its loss of public trust and subsequent bankruptcy.
How could Enron have so massively misestimated the fair value of its Braveheart investment, and how could Andersen have allowed Enron to report these values and their increases as profits? Indeed, the Examiner in Bankruptcy (Batson, 2003a, pp. 30–31) finds that Andersen prepared the appraisal of the project’s value. Andersen assumed the following: (1) the business would be established in 10 major metro areas within 12 months; (2) eight new areas would be added per year until 2010 and these would each grow at 1% a year; (3) digital subscriber lines (DSLs) would be used by 5% of the households, increasing to 32% by 2010, and these would increase in speed sufficient to accept the broadcasts; and (4) Braveheart would garner 50% of this market. After determining (somehow) a net cash flow from each of these households and discounting by 31–34%, the project was assigned a fair value. I suggest that this calculation illustrates an essential weakness of level 3 fair-value calculations that necessarily are not grounded on actual market transactions. How can one determine whether or not such assumptions about a ‘‘first-time’’ project are ‘‘reasonable’’?
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