One way Enron manipulated its financial statements was to sell assets at inflated prices to other firms, while giving a promise to buy back those assets at a later date. The incoming cash was recorded as revenue, but the promise to buy back the assets was not disclosed. Which of the following is one of the ways that such a transaction is deceptive?
A) The assets should have been listed on the balance sheet as long-term assets.
B) Cash raised by selling assets should not be recorded as revenue.
C) The off-balance sheet promises to repurchase assets should have been disclosed in management discussion and analysis (MD&A) or notes to the financial statement.
D) Both B and C are deceptive.

Question

Quizplus · Accepted Answer

Both options B and C are deceptive. Recording cash raised by selling assets as revenue without disclosing the promise to buy back the assets in off-balance sheet arrangements is misleading and distorts the true financial position of the company. Therefore, it violates GAAP and is considered fraudulent accounting.

One Way Enron Manipulated Its Financial Statements Was to Sell