Mark-to-Market Accounting as a Manipulation Tool

a) Understanding the approaches, which is used by the management of Enron in manipulating their current annual report:

The article relevantly sheds light on the case of Enron, which indicates the manipulation that has been used by the management in formulating their annual report. The authors of the article, Paul, Healy and Krishna relevantly highlighted the manipulations that is being used by the organisation in their article. The management of Enron has mainly manipulated the use of mark-to-market accounting approach, which was being used for altering their current financial performance and projecting wrong information to their shareholders (Healy and Palepu 2003). The article also indicated the alternations, which has been used by the organisation in manipulating their overall financial performance and helped in hiding the deteriorating financial performance of the company. the anticipated income of the company was mentioned in the annual report of Enron with the help of mark-to-market accounting approach, where the future incomes of the organisation was mainly discounted in registered in the current fiscal years financial report. The inclusion relevantly increased the level of sales and financial strength of the organisation, where the actual revenue was not present in the financial books. Therefore, with the incorporation of mark-to-market accounting approach, the management of Enron was mainly able to improve their performance in the books by portraying wrong information in the annual report.

The management was mainly able to recognise income from future operation in the current fiscal year with the help of mark-to-market accounting approach. The management was mainly able to input the financial revenue of 110 million and 0.5 billion in their annual report with the help of mark-to-market accounting approach. The 110 million revenue was mainly coming from a deal of 20 year, which was conducted with the blockbusters. However, the Enron was not progressing with the project while its revenue was included in the annual report, which relevantly increased concern regarding the current financial performance organisation. Moreover, 1.3 billion worth deal was mainly signed by Enron with Indianapolis, where the organisation would be providing the relevant products. However, the deal was mainly for a longer duration of 20 years, while the use of mark-to-market accounting approach allowed Enron to acknowledge revenues worth 0.5 billion in their annual report (Healy and Palepu 2003). Therefore, it could be understood that the management of Enron with the help of mark-to-market accounting approach was able to manipulate their annual report and boost their financial performance even after not getting the actual income during the fiscal year. Maskell, Baggaley and Grasso (2016) mentioned that due to the presence of alternative measures the organisations are able to manipulate their annual report, while portraying wrong information to their investor.

b) Understanding the measures used by Enron such as Special Purpose Entities, which is used for formulating their annual report:

Special Purpose Entities is considered to be the relevant measures, which was being used by the organisation for improving their current financial performance in their annual reports. The Special Purpose Entities was mainly used by the organisation for the purpose of relevant contracts, which were considered to be an off-balance sheet financial estimate. The method directly allowed the organisation for reducing the level of debt accumulation in their annual report and present positive financial condition to their investors. The purchase of gas reserves was mainly conducted by the management of Enron with the help of Special Purpose Entities, where the shareholders of the Special Purpose Entities were provided with the constant revenue income from the contract. The management was mainly able to utilises the Special Purpose Entities, while reducing the risk and contract obligations in their annual report, which directly allowed the company to boost its financial performance. Therefore, with the help of Special Purpose Entities the company is mainly able to support the purchase of gas contracts, which was being used for supporting its long-term obligations. The management of Enron held around 100 of Special Purpose Entities, which helped in reducing the financial obligations in their annual report and depict high financial performance in the annual report (Healy and Palepu 2003). In this context, Barron, Chung and Yong (2016) mentioned that with the use of Special Purpose Entities the organisations are mainly able to manipulate their annual report for supporting their financial trend.

Special Purpose Entities: Off-Balance Sheet Financing

The management of Enron also used Special Purpose Entities for hiding their current financial decline by manipulating the level of debts, which was being used by the organisation. In addition, the provisions used in Special Purpose Entities directly allowed the organisation for reducing the level of debt in their annual report. Enron has relevantly conducted the acquisition of Chewco, Powers, Troubh and Winokur with the help of Special Purpose Entities, where the debt used in the purchases was not presented in the annual report with the help of the measure (Healy and Palepu 2003). This relatively projected the high financial position of the company in their annual report, which was not correct, as the organisation was acquiring high level of debt for the relevant purchases. The measure of Special Purpose Entities allowed the management for manipulating the debt level in the annual report. The management was also manipulating the relevant downsize risk measures, which directly helped in detecting the financial condition. The measure was also used by the organisation for presenting their manipulating financial performance which was used for luring in more investors into their vicinity. Further, evaluation of the article relevantly indicated that with the help of Special Purpose Entities some of the managers and employees of the organisation was making high end revenues, while the company was inuring losses. This manipulation was relevantly conducted by the management and employees for uplifting their personal gains, while the organisation was incurring losses from operations (Kim and Zhang 2016).

c) Understanding the decision made by Enron regarding the high compensation, which was being provide to the management and linking it with the agency theory:

The third major manipulation that was conducted by the management of Enron was regarding the high compensation method used in its operations. The organisation was mainly paying high end compensation to its management in form of shares-based payments. The total payment made to the management of the organisation was relevantly increasing over the period, which relevantly accumulated to 13% of the total outstanding share values of Enron that is considered to be at the levels of 96 million shares (Healy and Palepu 2003). The high compensation condition of the organisation was relevantly increasing the level of concern, as the managers would sell the shares, which will result in high supply of share in the market and decline share price of the organisation. The measure was relevant used by the organisation for motivating their managers in making accurate financial decisions, which might help in improving their performance, However, the agency theory used by the organisation in motivating the managers is relevantly helpful in boosting short term share price trend of the company, as the managers use the measure for boosting the share price. However, the measure does not allow the organisation for improving their future financial performance (Abdel-Maksoud, Cheffi and Ghoudi 2016).

a) Understanding the overall measurement methodologies of the organisation depicted in the annual report:

The financial report of Caltex Australia relevantly depicted the overall measurement methodologies, which has been used by the organisation in formulating their annual report. In addition, the company’s overall annual report indicates the presence of fair value measure, which has been used by the organisation for evaluating their assets and liabilities. This measure has mainly allowed Caltex Australia to identify the accurate financial condition of their assets and liabilities in the annual report. This measure is relevantly helpful in detecting the actual valuation of the assets that is currently held by the organisation and determine its financial position. The fair value measure is relevantly calculated in accordance with the Paragraphs 91-99 of IFRS 13 and AASB 9 Financial instruments, which allows the organisation to detect the accurate financial position of an organisation. Dutta and Patatoukas (2016) mentioned that with the measure depicted in the regulations AASB is relevantly able to regulate the financial reporting conditions of an organisation, which helps in depicting the accurate financial position. The organisation has relevantly used the AASB 9 clause for evaluating the overall asset and liabilities, while reducing the occurrence of unethical measures, which might inflate the financial position of the organisation (Caltex.com 2018). The fair value measures have been used by the organisation for adequately formulating the overall annual report and presenting the correct financial position to its shareholders.

b) Identifying the decision usefulness of the measures implemented by the organisation, while detecting the significance of decision usefulness condition:

High Compensation: Share-Based Payments to Management

The measures implemented by the organisation have relevantly allowed the management to improve their decision usefulness, where the fair value measure has helped in detecting the financial position. In addition, the measure has mainly allowed the management in making accurate decisions in improving their financial condition by taking steps for growth and prosperity (Caltex.com 2018). The fair value measurement has directly allowed the organisation to evaluate its financial position and determine the relevant measures, which needs to be taken to achieve substantial growth. The decision useful information is the critical feedback, which needs to be evaluated by the management during the decision making phase. With the presence of decision usefulness information the management is able to minimise the expenses level, which in turn increases their profits.

Therefore, it could be assumed that with the help of decision useful information the organisation is mainly able to make accurate decision towards its financial stability and growth. The decision useful information is mainly consisting of notes regarding the financial ratios, measurement used by the organisation and the debt position, whose information is relevantly helpful for the management to derive adequate measures, which can be taken for improving the current performance of the organisation. Marshall (2016) mentioned that with the help of historical patterns the management is able to understand the budgetary allocation, which needs to be conducted on each department for maintaining 100% productivity.

c) Conducting relevant critical analysis of the analysis of the techniques used by the organisation, while indicating the requirement of new technique that can be used by the company in completing the method:

The measurement methodology used by Caltex Australia is relevantly depicted in the above figure, which helps in understanding the level of fairness used by the company in measuring their assets. The company has been using the fair value measure in detecting the overall assets and liabilities, which has been accumulated over the financial year. This fair value method has relevantly helped in detecting the accurate financial position of the company and minimise the chance of manipulation that might be conducted by the management. The company has been using fair value of measurements for both its financial and non-financial assets, which eventually helps in depicting the accurate condition of the organisation. The AASB 9 financial instruments have mainly allowed Caltex Australia for detecting the accurate measures in valuing their financial assets, which can be used for portraying the accurate financial position in the annual report (Caltex.com 2018).

The fair value measures is relevantly considered to be one of the useful tools, which has been instructed by the IFRS, IAS and AASB for companies to use in preparing their annual report and depicting its accurate financial condition. This improvement has mainly allowed the company to improve their current financial performance and reduce the chance of unethical measures, which can be conducted by the management for inflating the annual report. Therefore, the current fair value measure that is being used by Caltex Australia has relevantly allowed the organisation for detecting their current financial performance portraying accurate annual reports.

References and Bibliography:

Abdel-Maksoud, A., Cheffi, W. and Ghoudi, K., 2016. The mediating effect of shop-floor involvement on relations between advanced management accounting practices and operational non-financial performance indicators. The British Accounting Review, 48(2), pp.169-184.

Barron, O.E., Chung, S.G. and Yong, K.O., 2016. The effect of Statement of Financial Accounting Standards No. 157 Fair Value Measurements on analysts’ information environment. Journal of Accounting and Public Policy, 35(4), pp.395-416.

Caltex.com. 2018. Annual Reports & Reviews | Caltex Australia. [online] Available at: https://www.caltex.com.au/our-company/investor-centre/annual-reports-and-reviews [Accessed 5 Oct. 2018].

Chan, S.H., Song, Q., Rivera, L.H. and Trongmateerut, P., 2016. Using an educational computer program to enhance student performance in financial accounting. Journal of Accounting Education, 36, pp.43-64.

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Dutta, S. and Patatoukas, P.N., 2016. Identifying conditional conservatism in financial accounting data: theory and evidence. The Accounting Review, 92(4), pp.191-216.

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Healy, P.M. and Palepu, K.G., 2003. The fall of Enron. Journal of economic perspectives, 17(2), pp.3-26.

Kim, J.B. and Zhang, L., 2016. Accounting conservatism and stock price crash risk: Firm?level evidence. Contemporary Accounting Research, 33(1), pp.412-441.

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Marra, A., 2016. The Pros and Cons of Fair Value Accounting in a Globalized Economy: A Never Ending Debate. Journal of Accounting, Auditing & Finance, 31(4), pp.582-591.

Marshall, D., 2016. Accounting: what the numbers mean. McGraw-Hill Higher Education.

Maskell, B.H., Baggaley, B. and Grasso, L., 2016. Practical lean accounting: a proven system for measuring and managing the lean enterprise. Productivity Press.

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Prentice, C.R., 2016. Why so many measures of nonprofit financial performance? Analyzing and improving the use of financial measures in nonprofit research. Nonprofit and Voluntary Sector Quarterly, 45(4), pp.715-740.