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Essay on Restatement of earnings
Two high-profile companies WorldCom and Enron have lately been issue to SEC analysis and consequent earnings restatements. Both companies also reported oddly high levels of total accruals leading up to these events.
In filing for bankruptcy, Enron listed assets of roughly $62 billion, making it the largest bankruptcy in U.S. history at that time. Even that milestone would be erased in July 2002, when WorldCom filed for bankruptcy with over $100 billion in assets. But it was still an unusually dramatic defeat for a company that had once been valued at more than $100 billion by the stock market (Romero, S., and J. D. Glater. 2002).
Enron filed restated financial results with the SEC on November 8. Including the losses incurred by JEDI in Enron Corp.'s finances reduced Enron's reported net income by $96 million in 1997, $113 million in 1998, $250 million in 1999, and $132 million in 2000, but increased net income by $5 million in the first three quarters of 2001 (Robertson, S. 2001). In all, Enron revealed that it had overstated its earnings by a total of $586 million over four and three-quarters years.
In addition, Enron had to include JEDI's debt with its own. This meant that Enron's debt should have been $711 million higher in 1997, $561 million higher in 1998, $685 million higher in 1999, and $628 million higher in 2000 (Eichenwald, K. 2002a).
In one day, the restatement added $2.59 billion of debt to Enron's books and wiped away roughly 20 percent of its earnings for the prior five years. Enron's 1998, 1999, and 2000 earnings all should have been lower and its 1997 results should have shown a loss of 1 cent per share rather than net income of 16 cents.
Enron also said it had discovered that employees other than Fastow had invested in the controversial partnerships—Kopper, Anne Yaeger....
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