In economic substance, these assets were not worth the amount at which they were being recorded. Second, Enron use of partnerships obscured its ownership control of assets as dept. Under GAAP, a 3 percent outside interest allows a company to exclude the partnership assets and debt from its records. Third, in some cases, Enron actually lent money from outside investors so they could buy the 3 percent ownership. After the transaction, Enron recorded a receivable for the amount of the loan-a receivable that was unlikely to be collected. .
• Full Discloser and transparency: discloser must be sufficient to ensure that the effects of the transaction are transparent to the reader of the financial statements. Enron did not meet the third criterion because the notes related to the SPEs in Enron's financial statements were written so obtusely that they were not transparent to the reader. There was very little public discloser regarding Enron's many hundreds of partnerships. Enron did not disclose that banks lent up to 97 percent of the capital needed to form a partnership. The partnership was expected to repay the loan from cash generated by the assets it received from Enron. If the partnership could not repay the loan, Enron pledged to make up the short falls in cash. .
Enron investors did not follow the three cardinal rules for investing. (1) Know your investments: Two of the nations most respected financial investors, Warren Buffet and Peter Lynch, have long recommended that people invest only in companies they know and understand. (2) Understand investment risk and how you handle risk: Enron was a risky company. It was on the cutting edge of a changing industry: deregulated energy. Over 90 percent of investors say they have a conservative to moderate investment philosophy, yet they invested heavenly in Enron. (3) Diversify your portfolio: Failing to adhere to this third and most important rule is where many Enron employees made their most serious mistake.