NVIDIA’s use of mark-to-market accounting mirrors Enron’s risky practices, with its auditor PwC highlighting judgment calls that raise red flags on valuation.

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NVIDIA has been utilizing mark-to-market (MTM) accounting, a method that records the fair value of assets and liabilities based on current market conditions. While legitimate and widely adopted, MTM can be risky when not carefully managed, and in the case of NVIDIA, this accounting practice has raised significant concerns.

The controversy lies in MTM’s potential for manipulation. MTM allows companies to book future gains as current income, a tactic that was notably abused during the Enron scandal, where revenue from long-term contracts was recorded immediately rather than over time. NVIDIA’s financial statements, filed with the U.S. Securities and Exchange Commission (SEC), reflect this practice, and it’s a matter of concern for investors and analysts alike.

One of the most alarming aspects of NVIDIA’s MTM use is the involvement of significant judgment calls in asset valuation. PwC, NVIDIA’s auditor, flagged the subjectivity involved in estimating provisions for excess or obsolete inventories. These assumptions about future demand and market conditions, while not inherently fraudulent, can easily lead to inflated asset values, a pitfall that contributed to the downfall of companies like Enron.

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For context, Enron’s abuse of MTM accounting led to its collapse, with its stock price plummeting from $90.75 to just $0.26. NVIDIA, despite not engaging in outright fraud, is walking a fine line with its use of MTM. In their February 10-K filing, they openly acknowledged factoring in future expected gains into their current income statements—a practice eerily reminiscent of Enron’s strategy.

The key issue here is the level of risk associated with using MTM without clear oversight. NVIDIA’s revenue figures, which include significant amounts from contracts that have not been paid, raise the question of whether these numbers are truly reflective of the company’s current financial health or if they’re merely inflated projections.

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With companies like SMCI seeing sharp declines and nearing delisting, NVIDIA could be facing a similar fate. As their financial reports continue to depend heavily on subjective judgments, investors must question whether this approach will lead to a similar collapse as seen with other tech giants like Cisco (CSCO).

The risks are clear, and the need for careful transparency in financial reporting is urgent. If NVIDIA doesn’t manage its MTM practices carefully, the company could soon face the same fallout that took down Enron and others before it.

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