Enron Case

"Accountancy is a system of recording, verifying, and reporting of the value of assets, liabilities, income, and expenses in the books of account to which debit and credit entries are chronologically posted to record changes in value."(Dictionary.com) It is the basic need of every business to have this system to maintain a record of their financial transactions. This system will inform a business of their worth, liabilities, and profits. However defective accounting practices lead to the misinformation of these results and cause troubles to the business itself and those that were involved. Several large businesses which practiced defective accounting are AIG, Enron, and Fannie Mae.

AIG or American International Group is a major American insurance corporation based at the American International Building in New York City. It was one of the largest companies the United States. However, AIG got to be one the largest insurance companies through deceptive accounting methods which can be traced back to 14 years since it was the methods were discovered. This company has been making transactions with its offshore entities since 1991 that were considered illegal. Some of these offshore companies are Astral Reinsurance, General Re, Union Excess Reinsurance Company and the Capco Reinsurance Company. AIG has been able to make raise its net profits by a huge amount by conducting the transactions with it offshore entities which were all reinsurance companies. "A reinsurance company insures the insurers--that is, it sells insurance plans to insurance companies that are seeking to offload some of the risk they have acquired from corporations and individuals." (Joseph Kay) "For example, Astral Reinsurance, while little known, was a significant offshore reinsurer, with about $18 billion in net profits in 2000, according to a former senior executive of A.I.G."(Lynnley Browning) Another case in which AIG gained huge net profit was made in the year 2000 with General Re. In this transaction the role of insurer and reinsurer changed roles between AIG and General Re. "General Re agreed to pay AIG a $500 million premium, and in return AIG assumed the risk from a number of policies General Re had sold to other companies. This by itself would not have been illegal. However, the policies General Re handed over to AIG had little or no risk: The claims that AIG would have to pay out over time would almost certainly equal the same premium of $500 million."(Joseph Kay) The result of this deal is AIG received a loan from General Re. However, they did not report the transaction as a loan but as an insurance contract instead because if they reported this as a loan it would lower the company's income which AIG would hate to do. The transaction "enabled A.I.G. to artificially inflate its reserves by $250 million in the fourth quarter of 2000 and the first quarter of 2001. A.I.G. bought a portfolio of insurance coverage from General Re that would result in future losses but at that moment allowed A.I.G. to add $500 million in reserves."(Jenny Anderson) The result of the defective accounting led to a $1.6 billion fine for AIG and criminal charges for some of its executives.

Enron was an American energy company based in Houston, Texas. Before its bankruptcy in late 2001, Enron employed approximately 22,000 and was one of the world's leading electricity, natural gas, pulp and paper, and communications companies, with claimed revenues of nearly $101 billion in 2000. At the end of 2001 it was revealed that its reported financial condition was sustained substantially by institutionalized, systematic, and creatively planned accounting fraud. "Enron had created offshore entities, units which may be used for planning and avoidance of taxes, raising the profitability of a business. This provided ownership and management with full freedom of currency movement and the anonymity that allowed the company to hide losses. These entities

...