Balance-induced business redeployment

In the wake of the Enron scandal in 2001, a term used to describe the fact that accounting does not reflect the course of business, as it should, but rather determines it. – Enron Corporation, headquartered in Houston, Texas, was the result of a mega-merger in 1985. Starting in 1998, it increasingly shifted its focus from its traditional business in pipelines, power plants and energy supply facilities to speculative long-term energy contracts. While investments in pipelines and energy assets had to be accounted for at cost, the contracts, valued at fair value, could be transferred to off-balance sheet business. This was because a risk (as the product of the amount of loss and the probability of loss) only had to be recognized in the balance sheet if the probability of loss occurring exceeded fifty percent. Billion-dollar risks were therefore only mentioned in the notes to the balance sheet (Management Discussion and Analysis). – In December 2001, losses on the contracts drove Enron Corporation (the company was among the ten largest corporations in the United States) into insolvency, which attracted considerable attention worldwide. – See audit directive, Anderson scandal, angels, fall, consulting-audit mix, accounting scandal, accounting manipulative, credit substitute, Sarbanes-Oxley Act, auditors, special purpose entity.

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University Professor Dr. Gerhard Merk, Dipl.rer.pol., Dipl.rer.oec.
Professor Dr. Eckehard Krah, Dipl.rer.pol.
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