Enron: what happened and what we can learn from it
George J. Benston *, Al L. Hartgraves
Goizueta Business School, Emory University, 1300 Clifton Road, Atlanta, GA 30322-2710, USA
Abstract Enron’s accounting for its non-consolidated special-purpose entities (SPEs), sales of its own stock and other assets to the SPEs, and mark-ups of investments to fair value substantially inﬂated its reported revenue, net income, and stockholders’ equity, and possibly understated its liabilities. We delineate six accounting and auditing issues, for which we describe, analyze, and indicate the eﬀect on Enron’s ﬁnancial statements of their complicated structures and transactions. We next consider the role of Enron’s board of directors, audit committee, and outside attorneys and auditors. From the foregoing, we evaluate the extent to which Enron and Andersen followed the requirements of GAAP and GAAS, from which we draw lessons and conclusions. Ó 2002 Elsevier Science Inc. All rights reserved.
1. Introduction On October 16, 2001, Enron Corporation of Houston, Texas, one of the largest corporations in the world, announced it was reducing its after-tax net income by $544 million and its shareholders’ equity by $1.2 billion. 1 On November 8, it announced that, because of accounting errors, it was restating its previously reported net income for the years 1997–2000. These restatements reduced previously reported net income as follows: 1997, $28 million (27% of
Corresponding author. Tel.: +1-404-727-7831; fax: +1-404-727-6313. E-mail address: email@example.com (G.J. Benston). 1 Enron’s size is measured in terms of its gross revenue. However, Enron’s measure is not the same as other corporations’ sales, because a large portion of its revenue is derived from sales of energy and other contracts for which it operates essentially as a broker. 0278-4254/02/$ - see front matter Ó 2002 Elsevier Science Inc. All rights reserved. PII: S 0 2 7 8 - 4 2 5 4 ( 0 2 ) 0 0 0 4 2 - X
G.J. Benston, A.L. Hartgraves / J. Accounting and Public Policy 21 (2002) 105–127
previously reported $105 million); 1998, $133 million (19% of previously reported $703 million); 1999, $248 million (28% of previously reported $893 million); and 2000, $99 million (10% of previously reported $979 million). These changes reduced its stockholders’ equity by $508 million. Thus, within a month, Enron’s stockholders’ equity was lower by $1.7 billion (18% of previously reported $9.6 billion at September 30, 2001). On December 2, 2001, Enron ﬁled for bankruptcy under Chapter 11 of the United States Bankruptcy Code. With assets of $63.4 billion, it is the largest US corporate bankruptcy. 2 The price of Enron’s stock, which had increased spectacularly over the 1990s from a low of about $7 to a high of $90 a share in mid-2000, declined to under $1 by year-end 2001. Many Enron employees who had invested their taxdeferred 401(k) retirement plans in Enron stock saw their assets go from hundreds of thousands and even millions of dollars to almost nothing. This situation generated an enormous number of stories in the popular and ﬁnancial press and television news programs, hearings before several congressional committees, and investigations by the SEC and other statutory bodies. Following a three-month investigation, a Special Investigating Committee of the Board of Directors of Enron Corp., chaired by Dean William C. Powers, Jr. of the University of Texas School of Law, submitted its Report on February 1, 2002. 3 This narrative is based largely on that document (hereafter the ‘‘Powers Report’’) and on cited press reports. Enron’s bankruptcy is of particular interest to accountants, because its longtime auditor, Arthur Andersen, LLP (Andersen), is (or was) one of the Big 5 CPA ﬁrms. It has been charged with gross dereliction of duty and even fraud by the press and...