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When Enron filed for bankruptcy protection on December 2, 2001, the financial world was shocked. How could this high profile leader in the world of energy trading have failed? Based in Houston, Texas, Enron was the seventh largest company by revenues in the United States, employing 25,000 people worldwide. Its performance had been lauded in the media, and business school cases had held it up as a glowing example of the transformation of a conservative energy company into a global player. It had frequently been cited in the McKinsey Quarterly as an example of how innovative companies can outperform their more traditional rivals.

The drive to maintain reported earnings growth, however, had led Enron to aggressive accounting policies to accelerate earnings. In particular, the ‘special purpose entities’ (SPEs) Enron used to move assets and liabilities off the balance sheet attracted most attention. The financial involvement of Enron officers and employees in the SPEs led to further questions.

Enron executives regarded themselves as an elite. The company had largely left behind the Texan ‘good ol’ boy’ culture – and certainly the culture of the regulated utility and had embraced the free market vision of Chairman Kenneth Lay. Encouraged by Jeffrey Skilling, who later became CEO, a highly paid army of financially literate MBAs sought innovative ways to ‘translate any deal into a mathematical formula’ that could then be traded or sold on – often to SPEs set up for that purpose. By the end, Enron had in excess of 3,000 subsidiaries and unconsolidated associates, including more than 400 registered in the Cayman Islands.

The SPEs set up by Enron, often with auditor Arthur Andersen’s advice and approval, have attracted much criticism – but there is nothing inherently wrong with such vehicles. In fact, almost all major companies use various forms of SPEs to manage, for example, joint ventures in foreign countries, or investments in hostile environments. What was...
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