Enron Scandal
The Story
Enron was once America's seventh-largest company. Behind the impressive facade, executives engaged in massive accounting fraud using special purpose entities and mark-to-market accounting to hide billions in debt.
The company's culture encouraged aggressive accounting practices. Employees were rewarded for creating new revenue streams regardless of profitability. Arthur Andersen, a top accounting firm, was complicit and shredded documents when investigated.
When energy market conditions changed, the company couldn't hide problems. In October 2001, Enron announced a $638 million loss. Within weeks, the stock collapsed from over $90 to under $1.
🚩 Red Flags
- Impossibly complex financial statements
- Revenue reported before cash received
- Off-balance-sheet partnerships never explained
- Excessive executive compensation
- Aggressive retaliation against questioners
⚖️ The Fallout
Kenneth Lay was convicted but died before sentencing. Skilling received 24 years (reduced to 14). Arthur Andersen dissolved. Thousands lost jobs and retirement savings. Led to Sarbanes-Oxley Act of 2002.
📚 Lessons Learned
Even large, prestigious companies can be built on fraud. Showed importance of independent oversight and dangers of conflicts of interest when auditors provide consulting services.
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