Enron Was America's Most Admired Company Right Up Until It Was a Crime Scene
Fortune named it America's most innovative company six years running. The innovation, it turned out, was mostly in the accounting.
Through the 1990s, Enron was the future: an energy trading giant whose stock kept climbing, whose executives kept getting profiled, and whose books kept being audited and approved, year after year, by one of the five biggest accounting firms in the world. Fortune named it "America's Most Innovative Company" for six consecutive years.
The innovation was Special Purpose Entities — off-the-books shell companies Enron used to hide billions in debt and inflate profits, engineered largely by CFO Andrew Fastow with sign-off from auditor Arthur Andersen, which was simultaneously being paid handsomely as Enron's consultant. In October 2001, Enron announced a $638 million quarterly loss and a $1.2 billion hit to shareholder equity. On November 8, it admitted to inflating income by $586 million since 1997.
On December 2, 2001, Enron filed for bankruptcy: at the time, the largest corporate bankruptcy in American history. Stock that had traded above $90 a share was worth less than a dollar. In between the loss announcement and the filing, Arthur Andersen's own legal counsel instructed staff to start shredding Enron-related documents — a detail that requires no satirical embellishment whatsoever.
Andersen was convicted of obstruction of justice in 2002 (later overturned on appeal, well after the firm had already ceased to exist) and dissolved as a company. Enron's collapse gave America the Sarbanes-Oxley Act and a permanent case study in what "the smartest guys in the room" actually means.
Filed from public reporting: Encyclopaedia Britannica, Enron scandal overview. Video: "Enron: The Smartest Guys in the Room" (official trailer).
