Enron's revenue soared on paper while billions in debt stayed hidden
At the end of 2000, Fortune rated Enron the most innovative large company in America, and its market value topped $60 billion. Barely a year later the Houston energy trader was bankrupt, its shares worth under a dollar, and its auditor Arthur Andersen, once among the world's five largest accounting firms, was finished.
Kenneth Lay created the company in 1985 by merging two pipeline firms, Houston Natural Gas and InterNorth, and renamed it Enron a year later. Deregulation let it trade energy, and by 1992 it was North America's biggest natural gas seller. It then spread into power plants, water, paper and broadband around the globe.
The numbers looked miraculous. Annual revenue was $13.3 billion in 1996; by 2000 it had reached $100.7 billion, growth of about 65 percent a year in an industry that considered 2 to 3 percent respectable. Part of the trick was booking the full value of every trade as revenue, where firms such as Goldman Sachs counted only their fee. Jeffrey Skilling also pushed mark-to-market accounting, letting Enron record the estimated future profit of a long-term contract the moment it was signed, cash or no cash. A 20-year video-on-demand venture with Blockbuster, signed in July 2000, was credited with more than $110 million in expected profit even after the partners pulled out. Chief financial officer Andrew Fastow built off-balance-sheet vehicles so convoluted that few could follow them.
Once the fraud surfaced in October 2001, rival Dynegy offered a bargain takeover that collapsed, and Enron filed for Chapter 11 on 2 December. With $63.4 billion in assets it was the largest corporate bankruptcy in American history until WorldCom the next year. Shareholders sued for $40 billion and eventually recovered $7.2 billion, while employees lost pensions.
Skilling went to prison; Lay was convicted but died before sentencing. Andersen was found guilty of destroying documents and lost its licence to audit public companies, and by the time the Supreme Court overturned the verdict it had already stopped operating. Congress answered with the Sarbanes–Oxley Act, raising penalties for falsifying records and demanding greater auditor independence.
Source: Enron scandal
