C. Richard Baker
University of Massachusetts Dartmouth
Rick Hayes
California State University, Los Angeles
Abstract: PRINCIPLES VERSUS RULES-BASED ACCOUNTING STANDARDS AND THE CONCEPT OF SUBSTANCE OVER FORM: THE CASE OF ENRON CORP.
Abstract
Revelations concerning accounting manipulations at Enron Corp., and the ensuing scandal surrounding these revelations, have prompted the FASB to reassess its approach to accounting standards setting with the intent of moving FASB standards setting processes closer to a principles-based approach instead of a rules-based approach. One area that IASB standards tends to emphasize more than FASB standards is the concept of substance over form. The bankruptcy of Enron Corp. provides a vivid illustration of how companies can use the legal form of transactions to obscure their economic substance. The purpose of this paper is to examine the concept of substance over form by investigating Enron's use of misleading accounting practices in the following areas: (1) off-balance-sheet financing; (2) revenue recognition; and (3) financial statement disclosures. In these three areas of accounting concern, the paper examines the relevant US GAAP requirements, along with the ways in which Enron manipulated GAAP while concealing the economic substance underlying transactions. It is the argument of this paper that had the concept of substance over form been applied at Enron, investors and creditors would have been provided with a more realistic view of the company's financial position and its results of operations, perhaps avoiding what became the one of the largest corporate bankruptcies in US history. The conclusion of the paper is that the FASB should focus on the concept of substance over form as it considers moving towards a principles-based approach to accounting standards setting.
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