Enron Scandal

Also known as: The Enron collapse · The Enron bankruptcy — the December 2, 2001 event styling · Enrongate — the scandal-suffix styling of the era's commentary · The Enron-Andersen affair — the pairing with the auditor's fall · The corporate scandal of 2001 — the survey styling that opens the Sarbanes-Oxley legislative history

Business

Definition

The Enron Scandal is the 2001 collapse of the Enron Corporation — the Houston-based energy trader formed by the 1985 combination of InterNorth and Houston Natural Gas and renamed Enron in 1986 — whose concealed losses and structured partnerships destroyed the company that Fortune had named “America’s Most Innovative Company” for six consecutive years while it claimed revenues of nearly US$101 billion in 2000. (Wikipedia — Enron) The unraveling ran from the spring of 2001 — when Bethany McLean’s March 5 Fortune piece “Is Enron Overpriced?” questioned a stock trading at fifty-five times earnings after peaking at $90.75 in August 2000 — through Jeffrey Skilling’s abrupt resignation as chief executive on August 14, 2001, the same day Sherron Watkins warned Kenneth Lay “I am incredibly nervous that we will implode in a wave of accounting scandals,” to the October 16, 2001 restatement that cut 1997–2000 earnings by $613 million and the Securities and Exchange Commission investigation that followed within weeks. (Wikipedia — Enron scandal) On December 2, 2001, Enron filed Chapter 11 in the Southern District of New York with $63.4 billion in assets — the largest bankruptcy in United States history to that date — its stock at $0.61 after the Dynegy rescue merger collapsed on November 28. (Wikipedia — Enron scandal, Wikipedia — Enron)

The scandal’s second subject is the auditor: Arthur Andersen, which had earned $25 million in audit and $27 million in consulting fees from Enron in 2000, shredded “tons of documents” and deleted nearly 30,000 e-mails as the investigation closed in, was convicted of obstruction of justice on June 15, 2002, surrendered its CPA licenses on August 31, 2002, and won a unanimous Supreme Court reversal on May 31, 2005 — three years too late — the record this wiki’s Arthur Andersen entry carries. (Wikipedia — Arthur Andersen, Wikipedia — Andersen v. United States) The Philippine connections run through the scandal’s whole architecture: Enron built power plants in developing markets “including the Philippines (Subic Bay)” in the 1990s, and its local subsidiary’s ten-year contract — signed in late 1992 or early 1993 at P2.0115 per kilowatt-hour against a competitor’s P1.46761 — surfaced in May 2002 in the Philippine Senate’s independent-power-producer review that followed the American collapse. (Wikipedia — Enron scandal, Philippine Star — 2002) In Manila’s professional world the same collapse realigned the audit market: SyCip, Gorres, Velayo & Co., Andersen’s Philippine member firm since 1985, moved to Ernst & Young on September 1, 2002 — the transition this wiki’s Arthur Andersen and Ernst & Young entries document. (Wikipedia — Arthur Andersen)

Identities

Source Type	Identity
Wikipedia	Enron scandal
Wikidata	Enron scandal (Q2723024) — “2001 accounting scandal of American energy company Enron” (verified this session)
DBpedia	Enron_scandal — label verified on the resource page this session
ProductOntology	N/A
Wiktionary	Enron — noun, “The events that led up to the bankruptcy of the Enron Corporation, or by extension any similar events” (verified this session)
Library of Congress Subject Headings (LCSH)	Enron Corp. — corporate name authority nr94001830 (verified this session via id.loc.gov names suggest); the company at the scandal’s center
MeSH	N/A
NCBI Taxonomy	N/A
AGROVOC	N/A
Google Scholar	Enron scandal 2001 bankruptcy Chapter 11 Skilling Lay Fastow LJM special purpose entities mark-to-market Arthur Andersen obstruction June 15 2002 Sarbanes-Oxley Subic Bay Philippines IPP review Napocor PPA Ponzi-era corporate governance
ConceptNet	N/A — ConceptNet API unreachable this session (HTTP 502)
OpenCyc	N/A

Also Known As

The Enron collapse
The Enron bankruptcy — the December 2, 2001 event styling
Enrongate — the scandal-suffix styling of the era’s commentary
The Enron-Andersen affair — the pairing with the auditor’s fall
The corporate scandal of 2001 — the survey styling that opens the Sarbanes-Oxley legislative history

Examples and Analogies

A trading floor wearing a utility’s clothes: Enron began as a pipeline combination and became a market-maker — mark-to-market accounting, approved by the SEC for its gas-futures trading on January 30, 1992, booked tomorrow’s projected profits today, the engine that took the stock up 311 percent from 1990 to 1998 and then 56 percent in 1999 and 87 percent in 2000. (Wikipedia — Enron scandal)
Debt hidden in plain sight: chief financial officer Andrew Fastow’s LJM partnerships moved losses off the balance sheet while Fastow himself drew $30 million from them — the structure the October 16, 2001 restatement forced into view, cutting earnings, raising liabilities $628 million, and cutting equity $1.2 billion. (Wikipedia — Enron scandal)
A run on a shadow bank: the November 21, 2001 quarterly report showed about $5 billion in borrowed cash exhausted in fifty days; the Dynegy merger, renegotiated from $8 billion to $4 billion, died on November 28 when the ratings agencies cut Enron to junk and the stock closed at $0.61. (Wikipedia — Enron scandal)
The Philippine plant in the portfolio: Enron International by 1994 held assets in roughly two dozen countries — the Philippines among them — with the Subic Bay power plant built into the archipelago’s early-1990s blackout crisis, and Enron’s 10-year Philippine power-purchase contract priced at P2.0115 per kilowatt-hour when the Senate’s 2002 review asked why Napocor “was paying much more than what we are getting.” (Wikipedia — Enron, Philippine Star — 2002)
Verified scandal data:
The company: InterNorth’s acquisition of Houston Natural Gas voted July 16, 1985; “Enron” introduced March 7, 1986; headquarters 1400 Smith Street, Houston; ~20,600 employees; Fortune‘s “America’s Most Innovative Company” 1996–2001; claimed revenues of nearly $101 billion in 2000 (Wikipedia — Enron)
The unraveling: stock peak $90.75 (August 2000); McLean’s “Is Enron Overpriced?” March 5, 2001; Skilling resigns August 14, 2001; Watkins letter the same day; Fastow’s LJM disclosure and SEC inquiry October 22, 2001; Fastow removed October 25, 2001; junk status and Dynegy withdrawal November 28, 2001; Chapter 11 December 2, 2001, with $63.4 billion in assets (Wikipedia — Enron scandal)
The auditor: document destruction; obstruction conviction June 15, 2002; CPA license surrender August 31, 2002; conviction reversed May 31, 2005, 9-0, in Arthur Andersen LLP v. United States, 544 U.S. 696 (Wikipedia — Arthur Andersen, Wikipedia — Andersen v. United States)
The Philippine strand: Subic Bay plant among Enron’s developing-market projects; local Enron subsidiary’s 10-year contract signed late 1992 or early 1993; P2.0115/kWh rate against Alsons’ P1.46761 disclosed by Justice Secretary Hernando Perez, May 15, 2002; SGV & Co.’s move from Andersen to Ernst & Young, September 1, 2002 (Wikipedia — Enron scandal, Philippine Star — 2002)

Usage Scenarios

1. Teaching Audit Failure

The Enron engagement is the profession’s canonical case: $25 million in audit fees beside $27 million in consulting fees from the same client, a Powers Committee finding in February 2002 that Andersen “did not fulfill its professional responsibilities,” and then the shredding — the sequence that produced both the criminal conviction and the Sarbanes-Oxley Act of 2002 this wiki’s entry documents. (Wikipedia — Arthur Andersen)

2. Studying the Philippine IPP Review

Philippine researchers use the scandal’s Manila echo: the Arroyo administration’s IPP review panel under Finance Secretary Jose Camacho and the proposed Senate inquiry that followed the American collapse, in which the Enron subsidiary’s 1992–1993 contract became the exhibit for the onerous power-purchase agreements blamed for the era’s electricity prices. (Philippine Star — 2002)

3. Tracing the Reform Aftermath

The scandal’s legislative product — the Sarbanes-Oxley Act signed July 30, 2002, with its PCAOB, Section 302 certifications, and Section 404 internal controls — reached Philippine practice both through U.S.-listed issuers and through the Philippine SEC’s parallel 2002 Code of Corporate Governance, the two regimes this wiki’s Sarbanes-Oxley entry holds together. (Wikipedia — Arthur Andersen)

4. Following the Criminal Cases

The personal accountability record runs from Fastow’s guilty plea and ten-year sentence through the sixteen Enron-related guilty pleas to the May 25, 2006 verdicts: Skilling convicted on nineteen of twenty-eight counts and sentenced to twenty-four years and four months (reduced by ten years in a 2013 Justice Department deal); Lay convicted on all six counts and dead of a heart attack on July 5, 2006, before sentencing. (Wikipedia — Enron scandal)

5. Measuring the Losses

The damages ledger: shareholders lost $74 billion over four years, $40–45 billion of it attributed to the fraud; about 62 percent of 15,000 employees’ savings plans had been held in Enron stock bought at $83; a 2004 settlement gave 20,000-plus former employees $85 million; and a $7.2-billion securities settlement followed in September 2008. (Wikipedia — Enron scandal)

Strategies

Book the future, hide the present: mark-to-market accounting let Enron report projected profits as current earnings while the LJM partnerships moved actual losses off the books — the two-part strategy whose discovery ran the stock from $90.75 to $0.61 inside sixteen months. (Wikipedia — Enron scandal)
Buy silence with consulting fees: the auditor that certified the statements also sold the company $27 million of advice — the fee structure that made independent assurance economically dependent on the client’s continuing business. (Wikipedia — Arthur Andersen)
Enter small markets through crisis contracts: Enron International’s Philippine entry rode the 1990–1993 blackout emergency and its fast-track contracts — the developing-market strategy that later put the Subic Bay plant and its take-or-pay structure before a Philippine review panel. (Wikipedia — Enron, Philippine Star — 2002)
Settle, legislate, and re-regulate: the system’s answers — the 2004 employee settlement, the 2008 securities settlement, and the 2002 statute — converted the scandal into the modern architecture of certification, audit oversight, and criminalized record destruction. (Wikipedia — Enron scandal, Wikipedia — Arthur Andersen)

Security and Safety Measures

Certification as market safeguard: the scandal’s central lesson — that earnings statements and the audits behind them are the capital market’s security perimeter — was codified in Sarbanes-Oxley’s officer certifications and its auditor-overseeing PCAOB. (Wikipedia — Arthur Andersen)
Record preservation as criminal law: Andersen’s destruction of “tons of documents” and nearly 30,000 e-mails became the obstruction conviction of June 15, 2002 and then Section 802’s twenty-year penalties — the retention duty the profession now teaches from this case. (Wikipedia — Arthur Andersen, Wikipedia — Andersen v. United States)
The instruction safeguard: the Supreme Court’s 2005 reversal held the jury could convict without “the requisite consciousness of wrongdoing” — a civil-liberties check on the very enforcement wave the scandal produced. (Wikipedia — Andersen v. United States)
Power-contract scrutiny as consumer protection: the Philippine echo — a Senate review asking whether the state utility was “paying much more than what we are getting” for the Enron subsidiary’s P2.0115-per-kilowatt-hour power — is the small-market version of the same investor-protection question. (Philippine Star — 2002)
For researchers: date the collapse precisely — the Chapter 11 filing is December 2, 2001, the Andersen conviction June 15, 2002, the reversal May 31, 2005 — and keep Enron’s Philippine plant (Subic Bay, verified) distinct from other Batangas-area projects with which it is sometimes conflated. (Wikipedia — Enron scandal, Philippine Star — 2002)

Historical Context

Enron rose through the 1990s on deregulation and financial engineering. The merger voted on July 16, 1985 created a pipeline company that Skilling’s trading model converted into a market-maker; the SEC’s January 30, 1992 approval of mark-to-market accounting for its gas-futures trading armed the earnings machine; and by December 31, 2000 the stock stood at $83.13 with a market capitalization above $60 billion — seventy times earnings, six times book — while Enron International’s plants in two dozen countries, the Philippines’ Subic Bay among them, contributed a quarter of 1996 earnings. (Wikipedia — Enron scandal, Wikipedia — Enron)

The fall took less than a year. McLean’s question of March 5, 2001; Skilling’s resignation and the Watkins letter of August 14; the October 16 restatement and the SEC inquiry; Fastow’s removal on October 25; the failed Dynegy merger of November 8–28; Enron Europe’s bankruptcy on November 30; and the December 2, 2001 Chapter 11 with $63.4 billion in assets — the largest American bankruptcy to that date, surpassed only by WorldCom in 2002. (Wikipedia — Enron scandal) Andersen followed its client down: the shredding surfaced in January 2002, Enron dismissed the firm that January 17, and the June 15, 2002 obstruction conviction and August 31 license surrender ended the practice, the 2005 Supreme Court reversal arriving to a firm that no longer existed in meaningful form. (Wikipedia — Arthur Andersen, Wikipedia — Andersen v. United States)

The Philippine threads braided through both years. Enron’s 1990s Manila venture — the Subic Bay plant and the ten-year Napocor contract signed in late 1992 or early 1993 — re-entered the news on May 15, 2002, when Justice Secretary Hernando Perez disclosed that one of the independent power producers under the government’s review was a local Enron subsidiary whose P2.0115-per-kilowatt-hour charge sat P0.5354 above a competitor’s rate, reviving his own 1993 privilege speeches calling such contracts onerous. (Philippine Star — 2002) And the audit world’s Manila reorganization — SGV & Co., Andersen’s Philippine member firm since 1985, becoming an Ernst & Young member practice on September 1, 2002 — carried the scandal into the Filipino profession’s history, as this wiki’s Arthur Andersen entry records. (Wikipedia — Arthur Andersen) The legislative aftermath — Sarbanes-Oxley, signed between the conviction and the license surrender on July 30, 2002 — closed the era this wiki’s Sarbanes-Oxley Act of 2002 entry surveys.

Challenges and Controversies

How the Watchdogs Failed

The audit failure is the scandal’s standing question: Andersen certified statements whose restatement cut four years of earnings by $613 million, and the Powers Committee concluded the firm “did not fulfill its professional responsibilities” — the failure that ended self-regulation for the American profession. (Wikipedia — Enron scandal, Wikipedia — Arthur Andersen)

Punishing a Firm for Its Employees

The Andersen conviction remains double-edged: the obstruction verdict punished document destruction by a partnership of thousands, and the unanimous 2005 reversal — jury instructions so vague the firm “could have been convicted without any proof that the firm knew it had broken the law” — vindicated the defendant after the punishment had done its work. (Wikipedia — Andersen v. United States)

The Employees Versus the Executives

The distribution of the damage is its own controversy: executives sold — Skilling at minimum 450,000 shares for roughly $33 million — while some 62 percent of 15,000 employees’ retirement savings, held in stock bought at $83, evaporated, and the eventual $85-million employee settlement measured a few thousand dollars per worker against $2 billion in lost pensions. (Wikipedia — Enron scandal)

The Philippine Contract Question

In Manila the scandal arrived as a question about the 1990s blackout-era contracts: whether the fast-tracked power-purchase agreements — the Enron subsidiary’s among them, at rates a justice secretary called onerous in 1993 and again in 2002 — had bound the state utility to paying for power it did not need, the local argument the Senate review and the PPA-cutting bill of 2002 inherited from the American collapse. (Philippine Star — 2002)

Lay’s Death and the Record

Kenneth Lay’s conviction on all six counts was vacated by his death on July 5, 2006 before sentencing — leaving the scandal’s chairman officially unconvicted and the victims’ civil recovery to proceed without a criminal judgment against him. (Wikipedia — Enron scandal)