Introduction
Despite the Enron case having been finalized early in the last decade, its effects are still being witnessed even as late as today. The top-level management at this company undertook one of the largest accounting scandals to have ever hit the corporate world resulting in the bankruptcy and dissolution of Enron. As a result, the Financial Accounting Standards Boards undertook amendments to increase the efficiency of the accounting principles governing the discipline. This move was welcomed by many not only in the industry but in the entire economy as serious loopholes had already been identified in the existing guidelines. Everyone expected the accounting body to rectify the situation which the top management at Enron had capitalized on to trick investors into buying their shares and hoping that this would never occur in the future.
Problem statement
But in a surprising twist of events, the amendments that were being advocated for have now also resulted in negative impacts on the market. The amendments that were undertaken initially just after the scandal exploded have all been identified as effective and well-founded. But the most recent ones that the body has undertaken have come under serious criticism as they impact negatively on the efficiency of the operation of companies especially those in the energy sector (Walter, 2011). The latest amendments involve leases and how they ought to be treated.
Description and analysis
The board has it that all lease transactions must be incorporated into the company’s balance sheet. They should either be treated as assets or liabilities every time the balance sheet is drawn. Traditionally, only the capital leases could be included in the balance sheets of the company. The board seems to be after the reporting of the true financial and leverage positions of a company which Enron altered to attract investors (William, 2011). With the leases incorporated into a company’s balance sheet, investors will find it relatively easier to assess the true financial position of a company.
But this is as far as the advantages can be identified as the rule also has some weaknesses. Many have raised concerns about its impact on the energy sector as it seems to punish energy-efficient companies. Apart from the accounting malpractices that were undertaken at Enron, the company was no doubt a major player that contributed a lot towards the energy sector. What the accounting board is doing is to over-regulate the sector. Companies that seek lease agreements to increase their level of efficiency will be heavily impacted upon by this condition and stand high chances of having bulky balance sheets. The common investors are not too well versed with the detailed accounting principles and will most definitely associate this with high leverage risks (Fox, 2003).
Conclusion
The accounting body ought to reconsider its stand on leases and how they should be treated. Even though there are genuine concerns on how they can be abused by irresponsible companies to misrepresent to the market individuals, they should not categorize all energy companies in the Enron bracket. What these companies are after is to increase their efficiency levels and only lease ventures can guarantee this. The decision to demonize lease agreements between companies seeking better operations efficiency does not augur well with the efforts to conserve both energy and the environment. Very soon, organizations will be discouraged into entering lease agreements that could result in the stagnation o the industry all because of the mistakes of a single party a decade earlier.
References
Fox, Loren (2003). Enron: the rise and fall. John Wiley & Son.
Walter Pavlo. (2011). Good Credit-Good Fraud.
William Pentland. (2011). Energy Deals Derailed by Obscure Accounting Rule.