Fair value in financial reporting: Problems and pitfalls in practice

This paper contributes to the debate on the use of mark to market accounting in financial reporting by means of a case study-based examination of the use of mark to market accounting by Enron Corp. in the years immediately preceding its collapse. Set in the context of historical developments in and theoretical discussion upon asset valuation and income measurement, the case study highlights: (i) the ease with which Enron was able to ‘monetize’ physical assets so as to bring them within the remit of mark to market accounting; (ii) the unreliability of valuation estimates provided by independent third parties; and (iii) the asymmetry between management desire to recognise mark to market gains through the income statement in contrast to their desire to avoid recognising mark to market losses.