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Beyond earnings management: Using ratios to predict Enron's collapse

Joseph T. Kastantin (College of Business Administration, University of Wisconsin‐La Crosse)

Managerial Finance

ISSN: 0307-4358

Article publication date: 1 September 2005

Abstract

This paper proposes a revised analytical model for accounting professionals that can be used to evaluate the financial well being of innovative companies that rely on earnings management practices (EM) for their growth. Through an analysis of corporate governance, financial reporting standards, and ratio analysis this paper reaches the conclusion that Enron extended previously researched earnings management practices that could have been detected in early 2000. Results of the analysis indicate that by using price book, price earnings multiple, net margin percentage, and return on assets, and taking into consideration the so‐called risk management activities which seemed to disguise highly volatile speculative derivative‐based activities, Enron was headed for implosion at least one year before its collapse.

Keywords

Citation

Kastantin, J.T. (2005), "Beyond earnings management: Using ratios to predict Enron's collapse", Managerial Finance, Vol. 31 No. 9, pp. 35-51. https://doi.org/10.1108/03074350510769857

Publisher

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Emerald Group Publishing Limited

Copyright © 2005, Emerald Group Publishing Limited