This entry is part 6 of 8 in the series Intro to Financial Reporting

Enron was an energy trading company. Rather than generate energy themselves, Enron made its money by buying and selling energy contracts. At one point, Enron was considered one of the most innovative companies on the market and reported sales of over $100 billion one year. Soon after, the company then reported losses of $618 million loss in the third quarter of 2001 (Nielsen, 2002, para. 1). A little later, the firm filed for Chapter 11 bankruptcy. “The company’s Chapter 11 filing [left] banks, pension plans and other lenders with at least $5 billion at risk. More than 4,000 Enron employees lost their jobs and 401(k) savings. The collapse reverberated the stock market, which dropped some $200 billion in value since Enron’s Dec. 2 filing, amid fears that other Enrons are lurking out there” (Jaffe, 2002, para. 3).

So how does a company go from reporting over $100 billion dollars in sales when they are really on the verge of bankruptcy? The answer lies in the deceptive accounting practices and outright fraud that Enron’s executives and auditors took part in. One factor is the massive amount of debt that Enron was hiding from its balance sheet. How does one go about hiding debt? “At the heart of Enron’s demise was the creation of partnerships with shell companies, many with names like Chewco and JEDI, inspired by Star Wars characters. These shell companies, run by Enron executives who profited richly from them, allowed Enron to keep hundreds of millions of dollars in debt off its books” (Nielsen, 2002, para. 4). At the same time, Enron’s board members, regulators, analysts, auditors, and even politicians looked the other way while Enron committed its fraud (Kadlec, 2001, para. 4). Enron’s auditing firm even went as far as to order their employees to shred all of the documents they used to do Enron’s audits! In the wake of Enron’s collapse, the general public demanded that the politicians step up, create, and enforce corporate law. This allowed for the creation of the Sarbanes-Oxley Act of 2002 which is still in effect today!

 

Jaffe, Stephen. TIME. (2002). How Fastow Helped Enron fall. Retrieved from 

Kadlec, Daniel. TIME. (2001). Power Failure. Retrieved from 

Nielsen, James. TIME. (2002). Enron: Who’s Accountable? Retrieved from