Enron, WorldCom, Global Crossings, Etc.

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Presentation transcript:

Enron, WorldCom, Global Crossings, Etc. Prepared by Rick Antle

Implement this Basic Picture Wealth (Balance Sheet) Wealth (Balance Sheet) Wealth (Balance Sheet) Time Income (Income Statement) Income (Income Statement)

How We Do It Economic concepts Accounting conventions Ideas that form the foundation of financial reporting. Accounting conventions To implement those ideas by setting the criteria for: Recognition, classification and valuation. Institutional context Incentives, enforcement environment, etc. that affect what people will do.

Economic Concepts - Deceptively Simple Entity Whose accounts are they? Wealth Value of assets minus liabilities Income Change in wealth, excluding contributions of and distributions to owners

Accounting Conventions Recognition How and what do we include in the accounting? Classification Where do we put it? Valuation What numbers do we use?

WorldCom A large telecommunications company Paid fees ($3.8 billion) to access other carriers’ networks Did they… Incur an expense that should reduce income, or Buy an asset?

It Depends Were future benefits acquired? If not, there is no asset Are those future benefits likely to be realized? If uncertainty is large enough, no asset will be recognized

Use WorldCom to Highlight Timing Effects Balance Sheet Balance Sheet Made an asset here Balance Sheet Time Income Statement Kept an expense off here Income Statement Would have been amortized here (and later)

Enron There is an easily overlooked part of the basic picture: The entity Accounting takes a point of view: The owners of the entity Example: You deposit money in a bank For you, it is an asset For the bank, it is a liability

Enron Basics: Debt Enron Enron Corp JEDI 1 Different companies? Creditors Enron Corp JEDI 1 Loan Payments Different companies? If so, debt is only JEDI’s. Two parts of same company? If so, debt is ENRON’s.

Enron Basics: Income Enron Enron JEDI 1 Corp Transfers Asset Cash Different companies? If so, SALE. Two parts of same company? If so, NOTHING.

More Complete Enron Picture Outside (?) investors Equity Payments Enron Corp JEDI Creditors Loan Assets transferred Cash Loan guarantee Still a basic question: ENTITY? Enron