Enron, Accounting and Lawyers

Abstract:     
Enron's collapse painfully illustrates the importance of financial accounting to all lawyers. Accounting is often referred to as "the language of business." Virtually every lawyer represents businesses, their owners, or clients with adverse legal interests, such as creditors and customers. Especially after Enron, lawyers cannot competently represent clients if they do not grasp certain basic principles about accounting. This article lists the top ten accounting lessons that any lawyer could learn from the scandal. These lessons include the components of a complete set of financial statements, the choices inherent in generally accepted accounting principles, the distortions possible in pro forma reporting, auditor independence, related-party transactions, internal controls, revenue recognition, guarantees, the accounting for the issuance of shares, and professional responsibilities related to questionable accounting policies or practices.

Keywords: Enron, cash flows, generally accepted accounting principles, pro forma financial statements, auditor independence, related-party transactions, internal controls, revenue recognition, guarantees, shareholders' equity, and professional responsibility

JEL Classifications: K10, K19, K20, K22, K30, M40

Accepted Paper Series