Analysis and Reaction Regarding the Enron Case

A simple truth that many overlook here is that everything Enron did was actually legal. It was devious, yes, but legal. The flaw is in the generally accepted accounting principles. Corporations must use accrual based accounting, meaning when something is "sold" or "bought" they must record it and are taxed on the transaction, even if the cash flow has never occurred. With the ease of establishing new small corporations, Executives can, and often do establish partnerships to "sell" their product to for a large amount of money, and it is recorded on statements as a financial gain, even though no cash flow has occurred. Eventually if the cash is not collected, and it never is in these cases, then it must be written off a bad debt expense. To avoid this, new partnerships are established and they cover the "losses" and put up new sales and new "profits". As an investor you are only able to see the end balance sheets and can not see how much money is spread over different partnerships or subsidiaries. This is the fundamental problem that must be addressed.…