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

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.