295.F公允价值计量属性的探析 外文原文

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1、Fair-value accounting: A cautionary tale from EnronGeorge J. Benston *Goizueta Business School, Emory University, Atlanta, GA 30322, United StatesAbstract：The FASBs 2004 Exposure Draft, Fair-Value Measurements, would have companies determine fair values by reference to market prices on the same asse

2、ts (level 1), similar assets (level 2) and, where these prices are not available or appropriate, present value and other internally generated estimated values (level 3). Enron extensively used level three estimates and, in some instances, level 2 estimates, for its external and internal reporting. A

3、 description of its use and misuse of fair-value accounting should provide some insights into the problems that auditors and financial statement users might face when companies use level 2 and, more importantly, level 3 fair valuations. Enron first used level 3 fair-value accounting for energy contr

4、acts, then for trading activities generally and undertakings designated as merchant investments. Simultaneously, these fair values were used to evaluate and compensate senior employees. Enrons accountants (with Andersens approval) used accounting devices to report cash flow from operations rather th

5、an financing and to otherwise cover up fair-value overstatements and losses on projects undertaken by managers whose compensation was based on fair values. Based on a chronologically ordered analysis of its activities and investments, I believe that Enrons use of fair-value accounting is substantial

6、ly responsible for its demise.1. IntroductionThe US and International Financial Accounting Standards Boards (FASB and IASB) have been moving towards replacing historical-cost with fair-value accounting. In general, fair values have been limited to financial assets and liabilities, at least in the fi

7、nancial statements proper.1 A Proposed Statement of Financial Accounting Standards, Fair-Value Measurements (FASB, 2005, p.5), specifies a fair-value hierarchy. Level 1 bases fair values on quoted prices for identical assets and liabilities in active reference markets whenever that information is av

8、ailable. If such prices are not available, level 2 would prevail, for which quoted prices on similar assets and liabilities in active markets, adjusted as appropriate for differences would be used (FASB, 2005, p.6). Level 3 estimates require judgment in the selection and application of valuation tec

9、hniques and relevant inputs. The exposure draft discusses measurement problems that complicate application of all three levels. For example, with respect to levels 1 and 2, how should prices that vary by quantity purchased or sold be applied and, where transactions costs are significant, should entr

10、y or exit prices be used? As difficult as are these problems, at least many independent public accountants and auditors have dealt with them extensively and are aware of measurement and verification pitfalls. However, company accountants and external auditors have had less experience with the third

11、level (at least for external reporting), which use estimates based on discounted cash flows and other valuation techniques produced by company managers rather than by reference to market prices. Indeed, there are few situations that have revealed the problems encountered when companies use third lev

12、el estimates for their public financial reports. Instances in which transaction-based historical-based numbers have been misleadingly and/or fraudulently reported abound, such as companies reporting revenue before it is earned (and sometimes not ever earned), inventories misreported and mispriced, a

13、nd expenditures capitalized rather than expensed. Mulford and Comiskey (2002) and Schilit(2002) provide many illustrations of suchschenanigans (as Schilit characterizes them). But they (and to my knowledge, few, if any, others) do not describe how fair-value numbers not grounded on actual market pri

14、ces have been misused and abused. Enrons bankruptcy and the subsequent investigations and public revelations of how their managers used level 3 fair-value estimates for both internal and external accounting and the effect of those measurements on their operations and performance should provide some

15、useful insights into the problems that auditors are likely to face should the proposed SFAS Fair-Value Measurements be adopted. Although Enrons failure in December 2001 had many causes,2 both immediate (admissions of massive accounting misstatements) and proximate (more complicated, as described bel

16、ow), there is strong reason to believe that Enrons early and continuing use of level 3 fair-value accounting played an important role in its demise. It appears that Enron initially used level 3 fair-value estimates (predominantly present value estimates) without any intent to mislead investors, but

17、rather to motivate and reward managers for the economic benefits they achieved for shareholders. Enron first revalued energy contracts, reflecting an innovation in how these contracts were structured, with the increase in value reported as current period earnings. Then level 3 revaluations were appl

18、ied to other assets, particularly what Enron termed merchant investments. Increasingly, as Enrons operations were not as profitable as its managers predicted to the stock market, these upward revaluations were used opportunistically to inflate reported net income. This tendency was exacerbated by En

19、rons basing managers compensation on the estimated fair-values of their merchant investment projects. This gave those managers strong incentives to over-invest resources in often costly, poorly devised, and poorly implemented projects that could garner a high fair valuation. Initially, some contract

20、s and merchant investments may have had value beyond their costs. But, contrary to the way fair-value accounting should be used, reductions in value rarely were recognized and recorded because they either were ignored or were assumed to be temporary. Market prices, specified as level 2 estimates in

21、Fair-Value Measurements (FASB, 2005), were used by Enron to value restricted stock, although in most instances they were not adjusted to account for differences in value between Enrons holdings and publicly traded stock, as specified by the FASB. Market prices were also used by Enrons traders in mod

22、els to value their positions. In almost all of these applications, the numbers used tended to overstate the value of Enrons assets and reported net income. As the following largely chronological description of Enrons adoption of level 3 fair-value accounting shows, its abuse by Enrons managers occur

23、red gradually until it dominated their decisions, reports to the public, and accounting procedures. Although, technically, fair-value accounting under GAAP was limited to financial assets, Enrons accountants were able to get around this restriction and record present-value-estimates of other assets

24、using procedures that were accepted and possibly designed by its external auditor, Arthur Andersen.2. Enrons adoption and use of fair-value accountingEnrons initial substantial success and later failure was the result of a succession of decisions. Fair-value accounting played an important role in th

25、ese decisions because it affected indicators of success and managerial incentives. These led to accounting cover-ups and, I believe, to Enrons subsequent bankruptcy. I present these developments essentially in chronological order, which shows how Enrons initial reasonable use of fair-value accountin

26、g evolved and eventually dominated its accounting and corrupted its operations and reporting to shareholders.2.1. Energy contractsEnron developed from the merger of several pipeline companies that made it the largest natural gas distribution system in the United States. In 1990, Jeffrey Skilling joi

27、ned Enron after having been a McKinsey consultant to the company. He had developed a method of trading natural gas contracts called the Gas Bank. Enrons CEO, Kenneth Lay, persuaded him to join the company. Skilling became chairman and CEO of a new division, Enron Finance, with the mandate to make th

28、e Gas Bank work, for which he would be richly compensated with phantom equity (wherein he received additional pay in proportion to increases in the market price of Enron stock). Enron Finance sold long-term contracts for gas to utilities and manufacturers. Skillings innovation was to give natural ga

29、s producers up-front cash payments, which induced them to sign long-term supply contracts. He insisted on use of mark-to-market(actually fair-value, as there was no market for the contracts) accountingto measure his divisions net profit. In 1991 Enrons board of directors, audit committee and its ext

30、ernal auditor, Arthur Andersen, approved the use of this mark-to-market accounting. In January 1992 the SEC approved it for gas contracts beginning that year. Enron, though, used mark-to-market accounting for its not-as-yet-filed 1991 statements (without objection by the SEC) and booked $242 million

31、 in earnings. Thereafter, Enron recorded gains (earnings) when gas contracts were signed, based on its estimates of gas prices projected over many (e.g., 10 and 20) years.In 1991, Enron created a new division that merged Enron Finance withEnron Gas Marketing (which sold natural gas to wholesale cust

32、omers) andHouston Pipeline to form Enron Capital and Trade Resources (ECT), all of which were managed by Skilling. He adopted fair-value accounting for ECTand he compensated the divisions managers with percentages of internally generated estimates of the fair values of contracts they developed. An e

33、arly (1992) example was a 20-year contract to supply natural gas to the developer of a large electric generating plant under construction, Sithe Energies. ECT immediately recorded the estimated net present value of that contract as current earnings. During the 1990s, as changes in energy prices indi

34、cated that the contract was more valuable, additional gains resulting from revaluations to fair value were recorded, which allowed Enron to meet its internal and external quarterly net income projections. By the late 1990s, Sithe owed Enron $1.5 billion. However, even though Enrons internal Risk Ass

35、essment and Control (RAC) group estimated that Sithes only asset (worth just over $400 million) was inadequate to pay its obligation, the fair value of the contract was not reduced and, consequently, a loss was not recorded. In fact, the loss was not recorded until after Enron declared bankruptcy.2.

36、2. “Merchant” investments Enron also used fair-value accounting for its merchant investmentspartnership interests and stock in untraded or thinly traded companies it started or in which it invested. As was the situation for the energy contracts, the fair values were not based on actual market prices

37、, because no market prices existed for the merchant investments. Although the SEC and FASB require fair-value accounting for energy contracts, FAS 115 limits revaluations of securities to those traded on a recognized exchange and for which there were reliable share prices, and valuation increases in

38、 non-financial assets are not permitted. Enron (and possibly other corporations) used the following procedure to avoid these limitations. Enron incorporated major projects into subsidiaries, the stock of which it designated as merchant investments, and declared that it was in the investment company

39、business, for which the AICPAs Investment Company Guide applies. This Guide requires these companies to revalue financial assets held (presumably) for trading to fair values, even when these values are not determined from arms-length market transactions. In such instances, the values may be determin

40、ed by discounted expected cash flow models, as are level 3 fair values.5 The models allowed Enrons managers to manipulate net income by making “reasonable” assumptions that would give them the gains they wanted to record. (Some notable examples are provided below.)Enron chief accounting officer, Ric

41、k Causey, used revaluations of these investments to meet the earnings goals announced by Skilling and Enrons CEO and Chairman of the Board, Kenneth Lay. “By the end of the decade,”McLean and Elkind (2003, p. 127) report, “some 35 percent of Enrons assets were being given mark-to-market treatment.” W

42、hen additional earnings were required, contracts were revisited and reinterpreted, if increases in their fair values could be recorded. However, recording of losses was delayed if any possibility existed that the investment might turn around.An example is Mariner Energy, a privately owned Houston oi

43、l-and-gas company that did deepwater exploration in which Enron invested and which it bought out for $185 million in 1996. Enrons accountants periodically marked-up its investment as needed to report increases in earnings until, by the second quarter 2001, it was on the books for $367.4 million. Ana

44、lyses in the second and third quarters of 2001 by Enrons Risk Assessment and Control department (RAC) that valued the investment at between $47 and $196 million did not result in accounting revaluations. After Enrons bankruptcy, Mariner Energy was written down to $110.5 million. 2.3 Braveheart partn

45、ership with BlockbusterIn the fourth quarter 2000 EBS announced a 20-year project (Braveheart) with Blockbuster to broadcast movies on demand to television viewers. However, Enron did not have the technology to deliver the movies and Blockbuster did not have the rights to the movies to be broadcast.

46、 Nevertheless, as of December 31, 2000, Enron assigned a fair value of $125 million to its Braveheart investment and a profit of $53 million from increasing the investment to its fair value, even though no sales had been made. Enron recorded additional revenue of $53 million from the venture in the

47、first quarter of 2001, although Blockbuster did not record any income from the venture and dissolved the partnership in March 2001. In October 2001 Enron had to announce publicly that it reversed the $110.9 million in profit it had earlier claimed, which contributed to its loss of public trust and s

48、ubsequent bankruptcy.How could Enron have so massively misestimated the fair value of its Braveheart investment, and how could Andersen have allowed Enron to report these values and their increases as profits? Indeed, the Examiner in Bankruptcy (Batson, 2003a, pp. 3031) finds that Andersen prepared

49、the appraisal of the projects value. Andersen assumed the following: (1) the business would be established in 10 major metro areas within 12 months; (2) eight new areas would be added per year until 2010 and these would each grow at 1% a year; (3) digital subscriber lines (DSLs) would be used by 5%

50、of the households, increasing to 32% by 2010, and these would increase in speed sufficient to accept the broadcasts; and (4) Braveheart would garner 50% of this market. After determining (somehow) a net cash flow from each of these households and discounting by 3134%, the project was assigned a fair

51、 value. I suggest that this calculation illustrates an essential weakness of level 3 fair-value calculations that necessarily are not grounded on actual market transactions. How can one determine whether or not such assumptions about a first-time project are reasonable?2.4. Energy management contrac

52、tsIn December 2000, after Skilling became president of Enron, he created a separate business, Enron Energy Services (EES), with Lou Pai as its CEO.EES expected to sell power to retail customers, based on assumptions thatthe market would be deregulated and that the existing utilities could be underso

53、ld.Enron sold 7% of EES to institutional investors for $130 million. Based on this sale (which might have qualified as a level 2 estimate), Enron valued the company at $1.9 billion, which allowed it to record a $61 million profit. However, EESs efforts were unsuccessful, in part because retail energ

54、y was generally not deregulated. Losses on the retail operations were not reported separately, but were combined with the wholesale operations. Pai then concentrated on selling contracts to companies and institutions to provide them with energy over long periods with guaranteed savings over their pr

55、esent costs. Customers often were given up-front cash payments in advance of the promised savings. These contracts were accounted for on a mark-to-fairvalue basis as of the date the contracts were signed. Sales personnel and managers (especially Pai) were paid bonuses based on those values. Not surp

56、risingly, this compensation scheme generated a lot of bad contracts. A particularly costly (to Enron) contract was signed in February 2001 with Eli Lilly to make improvements in its energy supply and use over 15 years. Discounting these amounts by 8.258.50%, Enron valued the contract at $1.3 billion

57、 and recorded a $38 million gain. Within two years, this contract was considered to be worthless. In 2001, after Pai left EES and Enron, a long-time in-house Enron accountant, Wanda Curry, was asked to evaluate the EES contracts. Her group examined 13 (of 90) contracts that comprised 80% of the busi

58、ness. Each of them had been recorded as profitable. Nevertheless, Curry found that the 13 contracts had a total negative value of at least $500 million. For example, a deal for which the company had booked $20 million in profits, actually was $70 million under water. Although, according to mark-to-f

59、air-value accounting the decrease in value documented by Curry should have been recorded, no such entry was made and Curry was reassigned.2.5. Derivatives tradingEnrons (derivatives) trading activities expanded beyond natural gas and power contracts to contracts in metals, paper, credit derivatives,

60、 and commodities. Much of this trading was done over an Internet system it developed, Enron On Line (EOL), which enabled Enron to dominate several markets. Enron often established the prices on those markets, prices that were used to mark its trades to fair values. Thus, Enrons traders could establi

61、sh the prices at which positions would be valued and, as described below, their compensation was determined.However, Partnoy (2002) found that the reported gains from trading derivatives were not reported accurately. Note, though, that these reported gains and losses were based on the traders estima

62、ted present (fair) values of the derivatives contracts, which often covered many years. Most of these contracts were not actively traded, or traded at all. The traders, therefore, valued them with models and estimates of forward price curves, both of which could be easily manipulated. As Partnoy (20

63、02, p. 327) puts it: because Enrons naturalgas traders were compensated based on their profits, traders had an incentive to hide losses by mismarking forward curves. . . .In some instances, a trader would simply manually input a forward curve that was different from the market. . . For more complex

64、trades, a trader would tweak the assumptions in the computer model used to value the trades, in order to make them appear more valuable.3. Management compensation, expenses, and fair-value accountingEnron promised investors that its earnings would grow by 15% a year, a goal that Enron employees coul

65、d meet with mark-to-fair-value valuations and revaluations of their projects. In addition, in granting options to its senior executives, Enron specified that a third would vest each year if Enrons earnings grew by at least 15% (McLean and Elkind, 2003, pp. 9293). Senior executives additionally were motivated to inflate the values of projects with bonuses and stock options based on a percentage of the mark-to-fair-values of the projects and deals they developed, as determined by their present-value calculations. Furthermore, Enron used a rank and yank system of evaluating employees, whereby t