Enron had ties to Chewco Investments LP and JEDI. They were classified as independent entities on Enron's financial statements. This allowed Enron to keep any losses associated with those firms away from its own earnings statement. In addition, they were able to increase the earnings they did report as a result of dealings with those companies. It turns out that Chewco and JEDI don't qualify as separate entities, and all of their losses should have been on Enron's financial statements.
Yet another way that Enron sought to optimize its financial statements was through the exploitation of an accounting loophole that allowed the company to register as revenue the gross value of energy-derived contracts, as opposed to the net value. Under this method of calculations, a company would able to register $300,000 worth of revenues if it traded $300,000 worth of energy, as opposed to just the $6,000 profit it made from the energy trade. Using this method, Enron was able to report an increase in its sales from $13.3 billion to $100.8 billion between 1996 and 2000.
The goals of these alterations are obvious. It would be hard to classify them as innocent mistakes made by Enron accountants. These were deliberate acts to improve Enron's financial statements. Even internal Enron risk management personnel were questioning the behavior. Dr. Vince Kaminski raised objections to Enron management, but they fell on deaf ears. According to the Wall Street Journal, "By last fall, [Kaminski] said he came to believe that some of the partnership-related transactions constituted an illegal scheme to hide losses and improve Enron's reported earnings." Enron was able to increase its cash reserves by not having to contribute money to the "over-funded" pension fund. The hiding of debts and losses in supposedly independent entities allowed the company to improve its earnings.
Another problem exists on the analysts" side of the equation.
