It was a very difficult prosecution for that reason. What Enron really excelled in was using the existing rules and regulations as a roadmap of the possible. And you see that play out time and time again.
Brancaccio: Do you see possible parallels with the blood-testing machine company Theranos? Allegations are Theranos was also fake-it-till-you-make-it, and maybe fake-it-till-you-make-it works for lots of companies.
McLean: The interesting thing, to me, is what you hit on: What is the line between a visionary and a fraudster? And sometimes I think: If Enron had been able to keep getting money from the markets, could Enron have been Netflix? Is it apples and oranges, two different types of disaster? I think the line between what happened at Enron and what happened in the global financial crisis is much blurrier than people might think. Both were examples of lots of people manipulating the rules and figuring out how to make money for themselves out of something that was pretty much destined to collapse and leave economic wreckage for a lot of others in their wake.
And both were, arguably, quite legal. There was just a different appetite for prosecution in the wake of Enron. I think one part of it is that what happened after Enron actively scared the Justice Department from prosecution because they did successfully prosecute Arthur Andersen, the big accounting firm.
I've sat through some big fraud trials in my time, and I always wonder what kind of person is willing to fiddle the books. According to counter-fraud expert Mark Button, criminology professor at Portsmouth University, one study shows fraudsters are likely to be extroverts with an ability to lie, able to "rationalise fraud as a normal sort of task, just shifting money around".
Dan McCrum says in his experience of reporting numerous frauds, such businesses are run "by psychopaths" with the ability to "look people in the eye and lie and lie again".
If these characters are liable to push the envelope with our accounting rules, how are the authorities dealing with that? In the UK, radical reform of external auditing has been long overdue, according to three independent reviews. Last year the Financial Reporting Council said more than a third of audits fell below expected standards and that there wasn't enough scepticism among auditors, or challenge of company directors.
In April the UK government published a White Paper which would hold directors of large companies responsible for the accuracy of financial statements. A new independent regulator of auditing will be set up and the Big Four firms may be forced to share audit work with smaller rivals. There will be a "separation" of consulting and auditing arms in these firms, though this stops short of a break-up.
According to Prem Sikka, the measures do not address the "corrosive culture" in accountancy firms, devoted to keeping clients happy. He argues companies "don't really need to perpetrate frauds" as there is so much discretion available to directors to use accounting loopholes. Lord Callanan, minister for corporate responsibility says: "The vast majority of companies, the vast majority of audits are honest and truthful.
We can't avoid all cases of fraud. We can try to discourage it, make directors more responsible and we can certainly give auditors the power to to uncover these cases. Image source, Getty Images.
In just 15 years, Enron grew to be the seventh largest US firm, employing 21, people in over 40 countries. The market value is hence determined based on what a company would expect to receive for the asset if it was sold at that point in time. Problems, however, can arise when the market-based measurement does not accurately reflect the underlying asset's true value.
This can occur when a company is forced to calculate the selling price of its assets or liabilities during unfavorable or volatile times, as during a financial crisis. For example, if the asset has low liquidity or investors are fearful, the current selling price of a bank's assets could be much lower than the actual value. It can also be manipulated by bad actors like Skilling and Enron's top management. Some believe MTM was the beginning of the end for Enron as it essentially permitted the organization to log estimated profits as actual profits and opened the door for further accounting manipulations.
For instance, Skilling advised the firm's accountants to transfer debt off of Enron's balance sheet to create an artificial distance between the debt and the company that incurred it.
The company set up special purpose vehicles SPVs , also known as special purposes entities SPEs , to formalize its accounting scheme that went unnoticed for a long time.
Enron continued to use these accounting tricks to keep its debt hidden by transferring it to its subsidiaries on paper. Despite this, the company continued to recognize revenue earned by these subsidiaries. As such, the general public and, most importantly, shareholders were led to believe that Enron was doing better than it actually was, despite the severe violation of GAAP rules. Skilling abruptly quit in August after less than a year as chief executive—and four months before the Enron scandal unraveled.
But, of course, it was related. Both Skilling and Kenneth Lay were tried and found guilty of fraud and conspiracy in Other executives plead guilty. Lay died in prison shortly after sentencing and Skilling served twelve years, by far the longest sentence of any of the Enron defendants. In the wake of the Enron scandal, the term " Enronomics " came to describe creative and often fraudulent accounting techniques that involve a parent company making artificial, paper-only transactions with its subsidiaries to hide losses the parent company has suffered through other business activities.
Parent company Enron had hidden its debt by transferring it on paper to wholly-owned subsidiaries —many of which were named after Star Wars characters—but it still recognized revenue from the subsidiaries, giving the impression that Enron was performing much better than it was. Another term inspired by Enron's demise was "Enroned," slang for having been negatively affected by senior management's inappropriate actions or decisions.
Being "Enroned" can happen to any stakeholder, such as employees, shareholders, or suppliers. For example, if someone has lost their job because their employer was shut down due to illegal activities that they had nothing to do with, they have been "Enroned. As a result of Enron, lawmakers put several new protective measures in place.
One was the Sarbanes-Oxley Act of , which serves to enhance corporate transparency and criminalize financial manipulation. The rules of the Financial Accounting Standards Board FASB were also strengthened to curtail the use of questionable accounting practices, and corporate boards were required to take on more responsibility as management watchdogs.
At the time, Enron's collapse was the biggest corporate bankruptcy to ever hit the financial world since then, the failures of WorldCom, Lehman Brothers, and Washington Mutual have surpassed it. The Enron scandal drew attention to accounting and corporate fraud as its shareholders lost tens of billions of dollars in the years leading up to its bankruptcy, and its employees lost billions more in pension benefits.
Increased regulation and oversight have been enacted to help prevent corporate scandals of Enron's magnitude. However, some companies are still reeling from the damage caused by Enron. Joint Committee on Taxation. Accessed Aug. George Benston. The New York Times. Business Essentials. Fiscal Policy. Your Privacy Rights.
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