Wednesday, May 18, 2005



Since 1997, mark-to-market (MTM) accounting has enabled companies to change the tax status of their earnings from capital gains or capital losses to ordinary income or losses. This occurs on the last day of the year, at which time they tally all of their open holdings as if they were selling them at the market price that day. In other words, the holdings are "marked to market".

On January 1st, they re-tally their holdings as if they were repurchasing them at the current price. The basis of each holding is then adjusted to reflect these hypothetical gains and losses for tax purposes.

The MTM method of accounting also allows companies to include as current earnings the profits they expect to earn in the future from energy-related contracts. At the end of each quarter when companies typically have these type of contracts on their balance sheets, their CFOs then estimate the fair value of the contracts, based in part on their forecasts for market conditions.

These quarterly changes in noncash values subsequently show up on income statements. Corporate managers have wide discretion in how they can interpret this rule. The independent Financial Accounting Standards Board debated this technique for the past three years, but ultimately decided to leave the interpretation to the individual companies.

Kenneth Lay: Enron Chief Executive Officer (CEO)
Jeff Skilling: President
Andrew Fastow: Chief Financial Officer (CFO)
J. Clifford Baxter: Vice Chairman

The movie provides an insight how the executives of Enron (one of America’s biggest companies, seventh largest at one point in time) exploited loopholes in existing business law and created new business models to defraud the public. But beyond being an entertaining, informative and complex financial story, the movie is about human fallibility, greed and arrogance.

Along the way new facts come to light: the involvement of the Bush family in this endeavour and how the company exploited deregulation to manipulate the California electricity crisis and the effects it had on the people living out there.

for language and some nudity

No comments: