How Important Was Fair Value Accounting to Enron’s Misleading Financial Statements?
Because of Enron’s swift and dramatic default, it is worthwhile to try to isolate and measure exactly what was “wrong” with its financial statements—what made them misleading. One way to do this is to investigate how various changes in Enron’s financial statements might have affected the way the company was perceived by investors. The risk of default is a central focus for most creditors and many equity investors. For example, bond ratings carry implications for the probability of default. Exhibit 1 presents the historical one-year average default experience associated with the ratings issued by Standard & Poor’s Corporation and Moody’s Investors Service. Enron’s senior unsecured bond ratings are shown in Exhibit 2. S&P rated Enron BBB+ from 1995 through late 2001 (Exhibit Series 1). Moody’s (Series 2) rated the company Baa2 until March 2001, when the rating improved to Baa1. These ratings are considered “investment grade” and they communicated the agencies’ belief that Enron had much-
Related Questions
- FASB has announced it will make changes to the fair value accounting standards in the next few weeks. Why didnt NCUA wait to see if those changes may have impacted the financial position of these corporate credit unions?
- What is a realistic timeframe for the implementation of fair value accounting or Solvency II?
- What is the fair value method for accounting for investments?
