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Resisting Corporate Corruption, 3rd Edition by Stephen V. Arbogast

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Case 3Enter Mark-to-Market: Exit Accounting Integrity?

I know mark-to-market isn’t the right accounting answer. It’s too bad that Jeff Skilling doesn’t care about the merits of the case.

SERGE GOLDMAN WAS NOT LOOKING FORWARD TO TOMORROW’S MEETING. It was May 1991. Goldman, Arthur Andersen’s (AA) engagement partner on the Enron account, was being pushed by his client to allow mark-to-market (MtM) accounting at one specific Enron unit: Enron Finance (EF). EF was a new unit, formed in just the last year. Its head, Jeffrey Skilling, had been an Enron employee only since August 1, 1990. Skilling had made it known that he wanted MtM for his unit. In fact, he told Enron chairman Ken Lay and president Rich Kinder that using MtM in EF was a condition for Skilling’s leaving McKinsey to join Enron.

Goldman had several problems with Enron’s requested change. For one thing, he wasn’t that familiar with MtM. Mark-to-market accounting, a relatively recent development, was used by Wall Street banks that traded marketable securities. Use of MtM was nonexistent in the Texas oil patch. Oil and gas accounting, on the other hand, was both well established and understood by accountants like Goldman. Serge felt uncomfortable being the first public accountant to approve using MtM in the oil and gas business.

Moreover, Goldman had concerns about the technical appropriateness of Enron’s using MtM. True, EF resembled investment banks in some ways. EF lent money to gas producers in return for an interest ...

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