Accounting standards

 Accounting is the art of recording

transactions in the best manner possible, so as
to enable the reader to arrive at
judgments/come to conclusions, and in this
regard it is utmost necessary that there are set
guidelines. These guidelines are generally
called accounting policies. To have a
harmonised accounting principle, Standards
needed to be set by recognised accounting
bodies
 List of accounting standards
  
 Disclosure of accounting policies:
 Valuation Of Inventories:
 Cash Flow Statements
 Contingencies and events Occurring after the Balance sheet Date
 Net Profit or loss For the period, Prior period items and Changes in accounti
ng Policies.
 Depreciation accounting.
 Construction Contracts.
 Revenue Recognition.
 Accounting For Fixed Assets.
 The Effect of Changes In Foreign Exchange Rates.
 Accounting For Government Grants.
 Accounting For Investments.
 Accounting For Amalgamation.
 Cont…..
 Employee Benefits.
 Borrowing Cost.
 Segment Reporting.
 Related Party Disclosures.
 Accounting For Leases.
 Earning Per Share.
 Consolidated Financial Statement.
 Accounting For Taxes on Income.
 Accounting for Investment in associates in Consolidated Financial Statement.
 Discontinuing Operation.
 Interim Financial Reporting.
 Intangible assets.
 Financial Reporting on Interest in joint Ventures.
 Impairment Of assets.
 Provisions, Contingent, liabilities and Contingent assets.
 Financial instrument.
 Financial Instruments, Disclosures and Limited revision to accounting standards.
 Cont…..
 Provisions, Contingent, liabilities and Contingent assets.
 Financial instrument.
 Financial Instrument: presentation.
 Financial Instruments, Disclosures and Limited revision to accounting
standards.
 Enron:
the scandal, the legend
 Key Players in the Enron
Scandal
 Kenneth Lay
 Former CEO of Enron, helped start the company.
 He quit as CEO in February 2001
 He returned as CEO in August 2001until he resigned on Jan.
 Jeffrey Skilling
 Enron's chief executive in the first half of 2001
 Since joining the company in 1990, Skilling helped
transform Enron from a natural-gas pipeline company
into an energy-trading powerhouse.
 David Duncan
 Enron's chief auditor at Anderson
 His job was to check Enron’s accounts
 He is accused of ordering the shredding of thousands of
Enron-related documents in an effort to hide them from
Securities and Exchange Commission investigators
 Andrew Fastow
 Former Chief Financial Officer of Enron
 The mastermind behind the deceptive accounting
practices
 Lea Fastow (his wife) also plead guilty to signing and
filing a tax return that did not include income the
Fastow’s had received from Mike Kopper
 Sherron Watkins
 Known as the "Enron whistle-blower"
 Was Enron's vice president of corporate development
 Wrote a letter to Kenneth Lay about “suspicions of
accounting improprieties"
 Enron

What Went Wrong?

 How did the collapse begin?
 Energy companies lobbied congress in the
1980s for deregulation of the energy
business
 Energy policy was changed and
Washington lifted controls on who could
produce energy and how it was sold
 Jeff Skilling took and aggressive approach
to expand Enron by trading futures in gas
contracts
 Early 2000
 Enron took advantage of the dot.com
boom and traded internet bandwidth
 The value of Enron’s online transactions
was huge ($880 billion)
 The problem was Enron wasn’t making
money on many of their online trades
because they made the market very
efficient
 Fuzzy Numbers
 Enron began tweaking the numbers in
their financial statements with accounting
techniques to hide their losses
 Enron created partnerships, and then
passed the assets (losses) to these
partnerships which eliminated the losses
from their balance sheets
 partnership
 Andrew Fastow (Chief Finance
Officer) created the
partnerships
 Condor and Raptor were two
major partnerships
 Whistleblower
 Sherron Watkins, the
Enron “Whistleblower”
noticed the fuzzy
accounting that had been
used in relationship to
the Condor and Raptor
partnerships and wrote a
letter to Kenneth Lay and
Arthur Anderson warning
him that the Enron was
unstable.
Why wasn’t Enron caught
earlier?
 Throughout all of this,
Enron and its key
members were making
political contributions to
the white house and
congress.
 Kenneth Lay donated
$100,000 to President
Bush in 2000, and in
2001 Bush invited Lay to
become an advisor to his
transition team.
 Politics
 In the year 2000,
Kenneth Lay met
three times with Dick
Cheney to discuss
energy policy review.
 When the review was
published in May
2001, it was very
favorable to the
Enron and the energy
sector.
 Declining position
 Aug 14, 2001 Jeff Skilling resigned,
Kenneth Lay became CEO once again.
 Stock prices began to fall, as investors
were uncertain about the company’s
stability.
 This started a chain reaction: Enron had
hedged against its own stock, so as long
as the stock price was declining, it could
not recover its losses.
 Bankruptcy
 December 2001,
Enron filed for
bankruptcy
 It’s share price had
collapsed from about
$95 to under $1.
 Bankruptcy
 Companies and large firms that are facing
severe and unmanageable debt may seek to file
chapter 11 bankruptcy, which allows them to re-
organize so they can either continue their day-
to-day operations or go out of business entirely.
 Under chapter 11, a company is protected from
damaging lawsuits and other negative measures,
but in exchange the company is usually required
to have all its major business decisions approved
by the bankruptcy court.
 Market Efficiency
 ``The market has already responded to the
potential of overstated profits in the same way it
responds to an unexpected negative event:
ready, fire, aim,'' says Jeffrey M. Applegate,
chief investment strategist at Lehman Brothers
Inc.
 This assumes a fully efficient market, one where
all current information is already included in the
prices.
 Rocking Washington
 After investors’ reaction to Enron and fear of more such
scandals, Conservatives have learned a sobering lesson:
 “The clamor for accountability in the financial system
means more rules and regulations in a sector they have
spent decades trying to deregulate.”
 Democrats, though, were soon out calling for limits on
the amount of company stock in 401(k) plans and moves
to ease shareholder suits against corporate officers,
directors, and auditors.
 Corruption & Regulation$
 After Enron, 89% of investors strongly favor the criminal
prosecution of corporate officials who are implicated in
serious financial fraud.
 New York Stock Exchange and the National Association
of Securities Dealers issued a proposal that would limit
compensation that analysts can receive from
investment-banking activity.
 Other rules: restrict analysts' trading of stocks they
cover, ban them from reporting to their firm's
investment bankers, and prohibit them from promising
favorable ratings to companies they cover.
 The Best Advice!
 Investors were left wondering whether they
could trust corporations, auditors, or stock
analysts.
 And the best outcome from the present wave of
angst would no doubt be a return to
commonsense investing. Investors should place
their bets on rationality, not the next
skyrocketing stock.
Thank
you