AZnomics"Fortune named Enron "America's Most Innovative Company" six years in a row. Every word of it was a lie."
Enron was the seventh-largest company in America. Its stock peaked at $90. Its executives were celebrated on magazine covers. When it collapsed in December 2001, it was the largest corporate bankruptcy in US history at the time — and revealed that the entire company had been built on fraudulent accounting, hidden debt, and outright theft.
Enron's trick was called "mark-to-market accounting." Instead of recording revenue when it was actually earned, Enron was allowed to book the estimated future value of contracts the moment they were signed — even if the money would never arrive. A 20-year energy deal worth $100 million would immediately appear as $100 million in revenue. Losses were hidden in hundreds of shell companies that never appeared on Enron's balance sheet. The books were fiction.
As executives sold their shares quietly, they encouraged employees to put their 401(k) retirement savings into Enron stock. When the stock collapsed from $90 to $0.26, employees lost everything — not just their jobs but their entire retirement savings. Meanwhile, CEO Ken Lay sold $300 million of stock before the collapse. His defence was that he didn't know. The jury didn't believe him.
Arthur Andersen, one of the five largest accounting firms in the world, had audited Enron's books and signed off on everything. When investigators arrived, Andersen employees were caught shredding documents. The firm was convicted of obstruction of justice and immediately lost all its clients. 85,000 people lost their jobs at a firm that had nothing to do with the fraud itself. One scandal destroyed a century-old institution overnight.
Enron created Sarbanes-Oxley — the most sweeping corporate governance reform since the 1930s. CEOs now personally certify their financial statements. Auditors cannot also be consultants to the same company. The question it permanently implanted: who audits the auditors?