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Twenty Years Later: The Lasting Lessons of Enron

enron us case study

Michael Peregrine  is partner at McDermott Will & Emery LLP, and  Charles Elson  is professor of corporate governance at the University of Delaware Alfred Lerner College of Business and Economics.

This spring marks the 20th anniversary of the beginning of the dramatic and cataclysmic demise of Enron Corp. A scandal of exceptional scope and impact, it was (at the time) the largest bankruptcy in American history. The alleged business practices of its executives led to numerous individual criminal convictions. It was also a principal impetus for the enactment of the Sarbanes-Oxley Act and the evolution of the concept of corporate responsibility. As such, it is one of the most consequential corporate governance developments in history.

Yet a new generation of corporate leaders has assumed their positions since then; for others, their recollection of the colossal scandal may have faded with the years. And a general awareness of corporate responsibility principles is no substitute for familiarity with the governance failings that reenergized, in a lasting manner, the focus on effective and responsible governance. A basic appreciation of the Enron debacle and its governance implications is essential to director engagement.

Enron was formed as a natural gas pipeline company and ultimately transformed itself, through diversification, into a trading enterprise engaged in various forms of highly complex transactions. Among these were a series of unconventional and complicated related-party transactions (remember the strangely named Raptor, Jedi and Chewco ventures) in which members of Enron’s financial leadership held lucrative financial interests. Notably, the management team was experienced, and both its board and its audit committee were composed of a diverse group of seasoned, skilled, and prominent individuals.

The company’s rapid financial growth crested in March 2001, with media reports questioning how it could maintain its high stock value (trading at 55 times its earnings). Famous among these was the Fortune article by Bethany McLean, and its identification of potential financial reporting problems at Enron. [1] In a dizzying series of events over the next few months, the company’s stock price collapsed, its CEO resigned, a bailout merger failed, its credit was downgraded, the SEC began an investigation of its dealings with related parties, and it ultimately declared bankruptcy. Multiple regulatory investigations followed, several criminal convictions were obtained and Sarbanes-Oxley was ultimately enacted to curb the perceived abuses arising from Enron and several similar accounting scandals. [2]

There remain multiple important, stand-alone governance lessons from Enron controversy of which all directors would benefit:

1. The Smartest Guys in the Room . The type of aggressive executive conduct that contributed heavily to the fall of Enron was not unique to the company, the industry or the times. In the absence of an embedded culture of corporate ethics and compliance, there is always the potential for some executives to pursue “edge of the envelope” business practices, especially when those practices produce meaningful near term financial or other operational results. That attitude, combined with weak board oversight practices, can be a disastrous combination for a company.

Even though commerce has made great progress since then on internal controls, corporate responsibility ultimately depends upon the integrity of management, and the skill and persistence of board oversight. [3]

2. The Critical Importance of Board Oversight . As the company began to implode, Enron’s board commissioned a special committee to investigate the implicated transactions, directed by William C. Powers Jr., then dean of the University of Texas School of Law. The Powers Report, as it came to be known, outlined in staggering detail a litany of board oversight failures that contributed to the company’s collapse. [4]

These included inadequate and poorly implemented internal controls; the failure to exercise sufficient vigilance; an additional failure to respond adequately when issues arose that required a prompt and serious response; cursory review of critical matters by the audit and compliance committee; the failure to insist on a proper information flow; and an inability to fully appreciate the significance of some of the information with which the board was provided. [5]

3. Spotting Red Flags . Amongst the most damaging of the governance breakdowns was the failure to question the legitimacy of the related-party transactions for which so many internal controls were required. These deficiencies served to bring a once significant company and its officers to their collective knees and offer many lasting governance lessons. As the Powers Report concluded with brutal clarity, a major portion of the company’s business plan—related-party transactions—was flawed. [6]

These transactions were replete with risky conflicts of interest involving management. There was a significant “forest for the trees” concern—an inability to recognize that conflicts of such magnitude that required so many board-approved internal controls and procedures should never have been authorized in the first place. All this, despite the fact that the individual Enron directors were people of accomplishment and capability who had been recognized by the media as a well-functioning board. [7]

Yet, they lacked the actual necessary independence to recognize the red flags waving before them. Their varied relationships with company leadership made them all-too-comfortable with what they were being told about the company. [8] This connection made it difficult for them to recognize the dangers associated with the warning signals that the conflicted transactions projected. Indeed it was the revelation of these conflicts that attracted media attention and ultimately “brought the house down”. [9]

4. It Can Still Happen . The 2020 scandal encompassing the German financial services company Wirecard offers one of the latest high profile (international) examples of how alleged aggressive business practices, lax internal and auditor oversight, accounting irregularities and limited regulatory supervision can combine into a spectacular corporate collapse that prompted numerous government fraud investigations. It is for no small reason that the Wirecard scandal is referred to as the “German Enron”. [10]

5. A Significant Legacy . Yet the Enron controversy remains fundamentally relevant as the spark behind the corporate responsibility environment that has reshaped attitudes about corporate governance for the last 20 years. It’s where it all began—the seismic recalibration of corporate direction from the executive suite back to the boardroom, where it belongs. It birthed the fiduciary guidelines, principles, and “best practices” that serve as the corridors of modern corporate governance, developed in direct response to the types of conduct so criticized in the Powers Report. [11]

And that’s important for today’s board members to know. [12] Because over the years, the message may have lost its sizzle. The once-key oversight themes incorporated within “plain old” corporate responsibility seem to be yielding the boardroom field to the more politically popular themes of corporate social responsibility. And, while still important, corporate compliance seems to have had its “fifteen years of fame” in the minds of some executives; the organizational initiative has turned elsewhere.

But the pendulum may be swinging back. There is a renewed recognition that compliance programs can atrophy from lack of support. The new regulatory administration in Washington may return to an emphasis on organizational accountability. As Delaware decisions suggest, shareholders may be growing increasingly intolerant of costly corporate compliance and accounting lapses. And there’s a renewed emphasis on the role of the whistleblower, and the board’s role in assuring the support and protection of that role.

So it may be useful on this auspicious anniversary to engage the board on the Enron experience, in a couple of different ways. First, include an overview as part of formal director “onboarding” efforts. Second, have a board level conversation about expectations of oversight, and spotting operational and ethical warning signs. And third, reconsider the Enron board’s critical and self-admitted failures, in the context of today’s boardroom culture. [13]

Such a conversation would be a powerful demonstration of a board’s good-faith commitment to effective governance, corporate responsibility and leadership ethics.

1 Bethany McLean, “Is Enron Overpriced?” Fortune, March 5. 2001. https://archive.fortune.com/magazines/fortune/fortune_archive/2001/03/05/297833/index.htm. (go back)

2 See , Michael W. Peregrine, Corporate BoardMember , Second Quarter 2016 (henceforth “Corporate BoardMember”). (go back)

3 See , e.g., Elson and Gyves, In Re Caremark : Good Intentions, Unintended Consequences, 39 Wake Forest Law Review, 691 (2004). (go back)

4 Report of the Special Investigation Committee of the Board of Directors of Enron Corporation, February 1, 2002. http://i.cnn.net/cnn/2002/LAW/02/02/enron.report/powers.report.pdf. (go back)

5 See , Michael W. Peregrine, “The Corporate Governance Legacy of the Powers Report” Corporate Counsel , January 23, 2012 Monday. (go back)

6 See , Michael W. Peregrine, “Enron Still Matters, 15 Years After Its Collapse”, The New York Times , December 1, 2016. (go back)

7 F.N. 5, supra . (go back)

8 See , Elson and Gyves, “The Enron Failure and Corporate Governance Reform”, 38 Wake Forest Law Review 855 (2003) and Elson, “Enron and the Necessity of the Objective Proximate Monitor”, 89 Cornell Law Review 496 (2004). (go back)

9 John Emshwiller and Rebecca Smith, “Enron Posts Surprise 3rd-Quarter Loss After Investment, Asset Write-Downs”, The Wall Street Journal , October 17, 2001. https://www.wsj.com/articles/SB1003237924744857040. (go back)

10 Dylan Tokar and Paul J. Davies, “Wirecard Red Flags Should Have Prompted Earlier Response, Former Executive Says” The Wall Street Journal , February 8, 2021. https://www.wsj.com/articles/wirecard-red-flags-should-have-prompted-earlier-response-former-execu tive-says-11612780200. (go back)

11 Corporate BoardMember , supra . (go back)

12 See Peregrine, “Why Enron Remains Relevant”, Harvard Law School Forum on Corporate Governance, December 2, 2016. (go back)

13 Corporate BoardMember , supra. (go back)

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The Enron Litigation Case Study: Lessons from a Corporate Catastrophe

The Enron scandal stands as one of the most infamous examples of corporate fraud in American history. The collapse of Enron Corporation not only led to significant financial losses for investors but also brought about widespread legal ramifications, regulatory reforms, and a rethinking of corporate governance practices. This case study delves into the intricacies of the Enron litigation, highlighting the key events, legal proceedings, and lasting impacts of the scandal.

Table of Contents

The Rise and Fall of Enron

Enron Corporation, once a titan in the energy sector, was founded in 1985 through the merger of Houston Natural Gas and InterNorth. Under the leadership of CEO Kenneth Lay, Enron rapidly expanded its operations, diversifying into various energy-related ventures and pioneering new trading strategies. By the late 1990s, Enron was hailed as one of the most innovative companies in America, boasting a market capitalization of over $60 billion.

However, behind the facade of success, Enron was engaged in a series of complex and fraudulent accounting practices designed to inflate its profits and hide its mounting debts. The use of special purpose entities (SPEs) and mark-to-market accounting allowed Enron to manipulate its financial statements, deceiving investors, analysts, and regulators.

The Unraveling of the Scandal

The downfall of Enron began in earnest in late 2001, when a series of investigative reports by financial analysts and journalists started to reveal discrepancies in the company’s financial statements. On October 16, 2001, Enron announced a massive third-quarter loss and disclosed the existence of over $1 billion in previously unreported debt. This announcement triggered a rapid decline in investor confidence and a precipitous drop in Enron’s stock price.

On December 2, 2001, Enron filed for bankruptcy, marking the largest corporate bankruptcy in U.S. history at the time. The fallout from Enron’s collapse was extensive, leading to significant financial losses for employees, investors, and pensioners, as well as the dissolution of Arthur Andersen, one of the world’s largest accounting firms, which was implicated in the scandal for its role as Enron’s auditor.

Legal Proceedings and Litigation

The Enron scandal led to a cascade of legal actions, targeting both the company and its executives. Key figures, including Kenneth Lay, Jeffrey Skilling (Enron’s COO and later CEO), and Andrew Fastow (CFO), faced criminal charges for their roles in the fraud.

Kenneth Lay : Charged with conspiracy, securities fraud, and making false statements, Lay was convicted on multiple counts in 2006. However, he died of a heart attack before sentencing, leading to the vacation of his conviction.

Jeffrey Skilling : Skilling was found guilty of conspiracy, securities fraud, and insider trading in 2006 and was sentenced to 24 years in prison. His sentence was later reduced to 14 years, and he was released in 2019.

Andrew Fastow : Fastow, the architect of many of Enron’s fraudulent schemes, pled guilty to conspiracy and was sentenced to six years in prison in 2006. He cooperated with prosecutors, providing valuable testimony against his former colleagues.

In addition to criminal prosecutions, numerous civil lawsuits were filed by investors, employees, and other stakeholders who suffered financial losses due to Enron’s collapse. These lawsuits resulted in significant settlements, including a $7.2 billion settlement in a class-action lawsuit against Enron’s banks, auditors, and law firms.

Regulatory Reforms

The Enron scandal underscored the need for stricter regulatory oversight and reforms in corporate governance. In response, the U.S. Congress enacted the Sarbanes-Oxley Act (SOX) in 2002, which introduced comprehensive changes to improve financial transparency, accountability, and the integrity of corporate disclosures.

Key provisions of SOX include:

  • Enhanced financial disclosures and accuracy requirements.
  • Increased penalties for corporate fraud.
  • Protections for whistleblowers.
  • The establishment of the Public Company Accounting Oversight Board (PCAOB) to oversee the auditing profession.

Lessons Learned

The Enron scandal serves as a stark reminder of the potential for corporate malfeasance and the devastating impact it can have on stakeholders. Key lessons from the Enron litigation case study include the importance of:

  • Robust internal controls : Effective internal controls and compliance programs are essential to prevent and detect fraudulent activities.
  • Transparency and accountability : Transparent financial reporting and accountability are critical to maintaining investor confidence and market integrity.
  • Regulatory oversight : Strong regulatory frameworks and oversight mechanisms are necessary to safeguard against corporate misconduct.
  • Ethical leadership : Corporate leaders must prioritize ethical behavior and decision-making to foster a culture of integrity and responsibility.

The Enron litigation case study remains a pivotal example of the consequences of corporate fraud and the necessity for rigorous oversight and ethical leadership in the corporate world. While the collapse of Enron was a monumental tragedy for many, the lessons learned from this scandal continue to shape the landscape of corporate governance and financial regulation, aiming to prevent similar occurrences in the future.

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What Was Enron?

Understanding enron, the enron scandal.

  • Mark-to-Market Accounting

What Happened to Enron

  • The Role of Enron's CEO

The Legacy of Enron

The bottom line.

  • Company Profiles
  • Energy Sector

What Was Enron? What Happened and Who Was Responsible

Adam Hayes, Ph.D., CFA, is a financial writer with 15+ years Wall Street experience as a derivatives trader. Besides his extensive derivative trading expertise, Adam is an expert in economics and behavioral finance. Adam received his master's in economics from The New School for Social Research and his Ph.D. from the University of Wisconsin-Madison in sociology. He is a CFA charterholder as well as holding FINRA Series 7, 55 & 63 licenses. He currently researches and teaches economic sociology and the social studies of finance at the Hebrew University in Jerusalem.

enron us case study

Investopedia / Daniel Fishel

Enron was an energy-trading and utility company based in Houston, Texas, that perpetrated one of the biggest accounting frauds in history. Enron's executives employed accounting practices that falsely inflated the company's revenues and, for a time, made it the seventh-largest corporation in the United States. Once the fraud came to light, the company quickly unraveled, filing for Chapter 11 bankruptcy in December 2001.

Key Takeaways

  • Enron was an energy company that began to trade extensively in energy derivatives markets.
  • The company hid massive trading losses, ultimately leading to one of the largest accounting scandals and bankruptcy in recent history.
  • Enron executives used fraudulent accounting practices to inflate the company's revenues and hide debt in its subsidiaries.
  • The SEC, credit rating agencies, and investment banks were also accused of negligence—and, in some cases, outright deception—that enabled the fraud.
  • As a result of Enron, Congress passed the Sarbanes-Oxley Act to hold corporate executives more accountable for their company's financial statements.

Enron was an energy company formed in 1986 following a merger between Houston Natural Gas Company and Omaha-based InterNorth Incorporated. After the merger, Kenneth Lay, who had been the  chief executive officer  (CEO) of Houston Natural Gas, became Enron's CEO and chair.

Lay quickly rebranded Enron into an energy trader and supplier. Deregulation of the energy markets allowed companies to place bets on future prices. In 1990, Lay created the Enron Finance Corporation and appointed Jeffrey Skilling, whose work as a McKinsey & Company consultant had impressed Lay, to head the new corporation. Skilling was then one of the youngest partners at McKinsey.

Enron provided a variety of energy and utility services around the world. Its company divided operations in several major departments, including:

  • Enron Online : In late 1999, Enron built its web-based system to enhance customer functionality and market reach.
  • Wholesale Services : Enron offered various energy delivery solutions, with its most robust industry being natural gas. In North America, Enron claimed to deliver almost double the amount of electricity compared to its second tier of competition.
  • Energy Services : Enron's retail unit provided energy around the world, including in Europe, where it expanded retail operations in 2001.
  • Broadband Services : Enron provided logistical service solutions between content providers and last-mile energy distributors.
  • Transportation Services : Enron developed an innovative, efficient pipeline operation to network capabilities and operate pooling points to connect to third parties.

However, by leveraging special purpose vehicles, special purpose entities, mark-to-market accounting, and financial reporting loopholes, Enron became one of the most successful companies in the world. Upon discovery of the fraud, the company subsequently collapsed. Enron shares traded as high as $90.75 before the fraud was discovered but plummeted to around $0.26 in the sell-off after it was revealed.

The former Wall Street darling quickly became a symbol of modern corporate crime. Enron was one of the first big-name accounting scandals, but uncovered frauds at other companies such as WorldCom and Tyco International soon followed.

Before coming to light, Enron was internally fabricating financial records and falsifying the success of its company. Though the entity did achieve operational success during the 1990s, the company's misdeeds were finally exposed in 2001.


Leading up to the turn of the millennium, Enron's business appeared to be thriving. The company became the largest natural gas provider in North America in 1992, and the company launched EnronOnline, its trading website allowing for better contract management just months before 2000. The company also rapidly expanded into international markets, led by the 1998 merger with Wessex Water.

Enron's stock price mostly followed the S&P 500 for most of the 1990's. However, expectations for the company began to soar. In 1999, the company's stock increased 56%. In 2000, it increased an additional 87%. Both returns widely beat broad market returns, and the company soon traded at a 70x price-earnings ratio.

Early Signs of Trouble

In February 2001, Kenneth Lay stepped down as Chief Executive Officer and was replaced by Jeffrey Skilling. A little more than six months later, Skilling stepped down as CEO in August 2001, with Lay taking over the role again.

Around this time, Enron Broadband reported massive losses. Lay revealed in the company's Q2 2001 earnings report that "...in contrast to our extremely strong energy results, this was a difficult quarter in our broadband businesses." In this quarter, the Broadband Services department reported a financial loss of $102 million.

Also, around this time, Lay sold 93,000 shares of Enron stock for roughly $2 million while telling employees via e-mail to continue buying the stock and predicting significantly higher stock prices. In total, Lay was eventually found to have sold over 350,000 Enron shares for total proceeds greater than $20 million.

During this time, Sherron Watkins had expressed concerns regarding Enron's accounting practices. A Vice President for Enron, she wrote an anonymous letter to Lay expressing her concerns. Watkins and Lay eventually met to discuss the matters, in which Watkins delivered a six-page report detailing her concerns. The concerns were presented to an outside law firm in addition to Enron's accounting firm; both agreed there were no issues to be found.

By October 2001, Enron had reported a third quarter loss of $618 million. Enron announced it would need to restate its financial statements from 1997 to 2000 to correct accounting violations.

Enron's $63.4 billion bankruptcy was the biggest on record at the time.

On Nov. 28, 2001, credit rating agencies reduced Enron's credit rating to junk status, effectively solidifying the company's path to bankruptcy. On the same day, Dynegy, a fellow energy company Enron was attempting to merge with, decided to nix all future conversations and opted against any merger agreement. By the end of the day, Enron's stock price had dropped to $0.61.

Enron Europe was the first domino, filing for bankruptcy after close of business on Nov. 30. The rest of Enron followed suit on Dec. 2. Early the following year, Enron dismissed Arthur Andersen as its auditor , citing that the auditor had yielded advice to shred evidence and destroy documents.

In 2006, the company sold its last business, Prisma Energy. The next year, the company changed its name to Enron Creditors Recovery Corporation with the intention of repaying any remaining creditors and open liabilities as part of the bankruptcy process.

Post Bankruptcy/Criminal Charges

After emerging from bankruptcy in 2004, the new board of directors sued 11 financial institutions involved in helping conceal the fraudulent business practices of Enron executives. Enron collected nearly $7.2 billion from these financial institutions as part of legal settlements. The banks included the Royal Bank of Scotland, Deutsche Bank, and Citigroup.

Kenneth Lay pleaded not guilty to eleven criminal charges. He was convicted of six counts of securities and wire fraud and was subject to a maximum of 45 years in prison. However, Lay died on July 5, 2006, before sentencing was to occur.

Jeff Skilling was convicted on 19 of the 28 counts of securities fraud he was charged with, in addition to other charges of insider trading. He was sentenced to 24 years and four months in prison, though the U.S. Department of Justice reached a deal with Skilling in 2013. The deal resulted in 10 years being cut off of his sentence.

Andy Fastow and his wife, Lea, pleaded guilty to charges against them, including money laundering, insider trading, fraud, and conspiracy. Fastow was sentenced to 10 years without parole to testify against other Enron executives. Fastow has since been released from prison.

Select Events, Enron Corp.
1990 Jeffrey Skilling (COO at the time) hires Andrew Fastow as CFO.
1993 Enron begins to use special-purpose entities and special purpose vehicles.
1994 Congress began allowing states to deregulate their electricity utilities.
1998 Enron merged with Wessex Water, a core asset of the new company by giving Enron greater international presence.
January 2000 Enron opens trading their own high-speed fiber-optic networks via Enron Broadband.
Aug. 23, 2000 Enron stock reaches an all-time high. Intra-day trading reaches $90.75, closing at $90.00 per share.
Jan. 23, 2002 Kenneth Lay resigns as CEO; Jeffrey Skilling takes his place.
April 17, 2001 Enron reports a Q1 2001 profit of $536 million.
Aug. 14, 2001 Jeffrey Skilling resigns as CEO; Kenneth Lay takes his place back.
Aug. 15, 2001 Sherron Watkins sends an anonymous letter to Lay expressing concerns about internal accounting fraud. Enron's stock price had dropped to $42.
Aug. 20, 2001 Kenneth Lay sells 93,000 shares of Enron stock for roughly $2 million
Oct. 15, 2001 Vinson & Elkins, an independent law firm, concludes their review of Enron's accounting practices. They found no wrongdoing.
Oct. 16, 2001 Enron reports a Q3 2001 loss of $618 million.
Oct. 22, 2001 The Securities and Exchange Commission opens a formal inquirity into the financial accounting processes of Enron.
Dec. 2, 2001 Enron files for bankruptcy protection.
2006 Enron's last business, Prisma Energy, is sold.
2007 Enron changes its name to Enron Creditors Recovery Corporation.
2008 Enron settles with financial institutions involved in the scandal, receiving settlement money to be distributed to creditors.

Causes of the Enron Scandal

Enron went to great lengths to enhance its financial statements, hide its fraudulent activity, and report complex organizational structures to both confuse investors and conceal facts. The causes of the Enron scandal include but are not limited to the factors below.

Special Purpose Vehicles

Enron devised a complex organizational structure leveraging special purpose vehicles (or special purpose entities). These entities would "transact" with Enron, allowing Enron to borrow money without disclosing the funds as debt on their balance sheet.

SPVs provide a legitimate strategy that allows companies to temporarily shield a primary company by having a sponsoring company possess assets. Then, the sponsor company can theoretically secure cheaper debt than the primary company (assuming the primary company may have credit issues). There are also legal protection and taxation benefits to this structure.

The primary issue with Enron was the lack of transparency surrounding the use of SPVs. The company would transfer its own stock to the SPV in exchange for cash or a note receivable. The SPV would then use the stock to hedge an asset against Enron's balance sheet. Once the company's stock started losing its value, it no longer provided sufficient collateral that could be exploited by being carried by an SPV.

Inaccurate Financial Reporting Practices

Enron inaccurately depicted many contracts or relationships with customers. By collaborating with external parties such as its auditing firm, it was able to record transactions incorrectly, not only in accordance with GAAP but also not in accord with agreed-upon contracts.

For example, Enron recorded one-time sales as recurring revenue. In addition, the company would intentionally maintain an expired deal or contract through a specific period to avoid recording a write-off during a given period.

Poorly Constructed Compensation Agreements

Many of Enron's financial incentive agreements with employees were driven by short-term sales and quantities of deals closed (without consideration for the long-term validity of the deal). In addition, many incentives did not factor in the actual cash flow from the sale. Employees also received compensation tied to the success of the company's stock price, while upper management often received large bonuses tied to success in financial markets.

Part of this issue was the rapid rise of Enron's equity success. On Dec. 31, 1999, the stock closed at $44.38. Just three months later, it closed on March 31, 2000 at $74.88. With the stock hitting $90 by the end of 2000, the massive profits some employees received only fueled further interest in obtaining equity positions in the company.

Lack of Independent Oversight

Many external parties learned about Enron's fraudulent practices, but their financial involvement with the company likely caused them not to intervene. Enron's accounting firm, Arthur Andersen, received many jobs and financial compensation in return for their services.

Investment bankers collected fees from Enron's financial deals. Buy-side analysts were often compensated to promote specific ratings in exchange for stronger relationships between Enron and those institutions.

Unrealistic Market Expectations

Both Enron Energy Services and Enron Broadband were poised to be successful due to the emergence of the internet and heightened retail demand. However, Enron's over-optimism resulted in the company over-promising online services and timelines that were simply unrealistic.

Poor Corporate Governance

The ultimate downfall of Enron was the result of overall poor corporate leadership and corporate governance . Former Vice President of Corporate Development Sherron Watkins is noted for speaking out about various financial treatments as they were occurring. However, top management and executives intentionally disregarded and ignored concerns. This tone from the top set the precedent across accounting, finance, sales, and operations.

In the early 1990s, Enron was the largest seller of natural gas in North America. Ten years later, the company no longer existed due to its accounting scandal.

The Role of Mark-to-Market Accounting

One additional cause of the Enron collapse was mark-to-market accounting. Mark-to-market accounting is a method of evaluating a long-term contract using fair market value. At any point, the long-term contract or asset could fluctuate in value; in this case, the reporting company would simply "mark" its financial records up or down to reflect the prevailing market value .

There are two conceptual issues with mark-to-market accounting, both of which Enron took advantage of. First, mark-to-market accounting relies very heavily on management estimation. Consider long-term, complex contracts requiring the international distribution of several forms of energy. Because these contracts were not standardized, it was easy for Enron to artificially inflate the value of the contract because it was difficult to determine the market value appropriately.

Second, mark-to-market accounting requires companies to periodically evaluate the value and likelihood that revenue will be collected. Should companies fail to continually evaluate the value of the contract, it may easily overstate the expected revenue to be collected.

For Enron, mark-to-market accounting allowed the firm to recognize its multi-year contracts upfront and report 100% of income in the year the agreement was signed, not when the service would be provided or cash collected. This form of accounting allowed Enron to report unrealized gains that inflated its income statement, allowing the company to appear much more profitable than it was.

The Enron bankruptcy, at $63.4 billion in assets, was the largest on record at the time. The company's collapse shook the financial markets and nearly crippled the energy industry. While high-level executives at the company concocted the fraudulent accounting schemes, financial and legal experts maintained that they would never have gotten away with it without outside assistance. The Securities and Exchange Commission (SEC), credit rating agencies, and investment banks were all accused of having a role in enabling Enron's fraud.

Initially, much of the finger-pointing was directed at the SEC, which the U.S. Senate found complicit for its systemic and catastrophic failure of oversight. The Senate's investigation determined that had the SEC reviewed any of Enron's post-1997 annual reports, it would have seen the red flags and possibly prevented the enormous losses suffered by employees and investors.

The credit rating agencies were found to be equally complicit in their failure to conduct proper due diligence before issuing an investment-grade rating on Enron's bonds just before its bankruptcy filing. Meanwhile, the investment banks—through manipulation or outright deception—had helped Enron receive positive reports from stock analysts, which promoted its shares and brought billions of dollars of investment into the company. It was a quid pro quo in which Enron paid the investment banks millions of dollars for their services in return for their backing.

Enron reported total company revenue of:

  • $13.2 billion in 1996
  • $20.3 billion in 1997
  • $31.2 billion in 1998
  • $40.1 billion in 1999
  • $100.8 billion in 2000

The Role of Enron's CEO

By the time Enron started to collapse, Jeffrey Skilling was the firm's CEO. One of Skilling's key contributions to the scandal was to transition Enron's accounting from a traditional historical cost accounting method to mark-to-market accounting, for which the company received official SEC approval in 1992.

Skilling advised the firm's accountants to transfer debt off Enron's balance sheet to create an artificial distance between the debt and the company that incurred it. 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 2001 after less than a year as chief executive—four months before the Enron scandal unraveled. According to reports, his resignation stunned Wall Street analysts and raised suspicions despite his assurances that his departure had "nothing to do with Enron."

Skilling and Kenneth Lay were tried and found guilty of fraud and conspiracy in 2006. Other executives plead guilty. Lay died shortly after his conviction, 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 lost their job because their employer was shut down due to illegal activities 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 2002, which enhances corporate transparency and criminalizes financial manipulation. The Financial Accounting Standards Board (FASB) rules were also strengthened to curtail the use of questionable accounting practices, and corporate boards were required to take on more responsibility as management watchdogs.

What Did Enron Do That Was So Unethical?

Enron used special purpose entities to hide debt and mark-to-market accounting to overstate revenue. In addition, it ignored internal advisement against these practices, knowing that its publicly disclosed financial position was incorrect.

How Big was Enron?

With shares trading for around $90/each, Enron was once worth about $70 billion. Leading up to its bankruptcy, the company employed over 20,000 employees. The company also reported over $100 billion of company-wide net revenue (though this figure has since been determined to be incorrect).

Who Was Responsible for the Collapse of Enron?

Several key executive team members are often noted as being responsible for the fall of Enron. The executives include Kenneth Lay (founder and former Chief Executive Officer), Jeffrey Skilling (former Chief Executive officer replacing Lay), and Andrew Fastow (former Chief Financial Officer).

Does Enron Exist Today?

As a result of its financial scandal, Enron ended its bankruptcy in 2004. The name of the entity officially changed to Enron Creditors Recovery Corp., and the company's assets were liquidated and reorganized as part of the bankruptcy plan. Its last business, Prisma Energy, was sold in 2006.

At the time, Enron's collapse was the biggest  corporate bankruptcy  ever to 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. 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.

U.S. Joint Committee on Taxation. " Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations, Volume 1: Report ," Page 56.

U.S. Joint Committee on Taxation. " Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations, Volume 1: Report ," Pages 59-63.

University of Chicago. " Enron Annual Report 2000 ."

U.S. Joint Committee on Taxation. " Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations, Volume 1: Report ," Pages 77 and 84.

Wall Street Journal. " Enron Announces Acquisition of Wessex Water for $2.2 Billion ."

University of Missouri, Kansas City. " Enron Historical Stock Price ."

The New York Times. " Enron Chairman Kenneth Lay Resigns, Company Says ."

University of Chicago. " Enron Reports Second Quarter Earnings ."

U.S. Securities and Exchange Commission. " SEC Charges Kenneth L. Lay, Enron's Former Chairman and Chief Executive Officer, with Fraud and Insider Trading ."

U.S. Securities and Exchange Commission. " Form 10-Q, 9/30/2001, Enron Corp. "

U.S. Joint Committee on Taxation. " Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations, Volume 1: Report ," Page 85.

GovInfo. " Enron and the Credit Rating Agencies ."

United States Bankruptcy Court. " Enron Corp. Bankruptcy Information ."

Blackstone. " Enron Announces Proposed Sale of Prisma Energy International Inc. "

GovInfo. " Enron Creditors Recovery Corp ."

JournalNow. " Judge OKs Billions to Enron Shareholders ."

United States Department of Justice. "Federal Jury Convicts Former Enron Chief Executives Ken Lay, Jeff Skilling on Fraud, Conspiracy and Related Charges ."

Federal Bureau of Investigation. " Former Enron Chief Financial Officer Andrew Fastow Pleads Guilty to Commit Securities and Wire Fraud, Agrees to Cooperate with Enron Investigation ."

U.S. Joint Committee on Taxation. " Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations, Volume 1: Report ," Page 62.

University of North Carolina. " Enron Whistleblower Shares Lessons on Corporate Integrity ."

U.S. Joint Committee on Taxation. " Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations, Volume 1: Report ," Pages 5-6 and 79.

George Benston. " The Quality of Corporate Financial Statements and Their Auditors Before and After Enron ."

U.S. Joint Committee on Taxation. " Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations, Volume 1: Report ," Pages 2, 44, and 70-75.

The New York Times. " Jeffrey Skilling, Former Enron Chief, Released After 12 Years in Prison ."

U.S. Joint Committee on Taxation. " Report of Investigation of Enron Corporation and Related Entities Regarding Federal Tax and Compensation Issues, and Policy Recommendations, Volume 1: Report ," Page 72.

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How the Enron Scandal Changed American Business Forever

Enron Sign

It’s the kind of historic anniversary few people really want to remember.

In early December 2001, innovative energy company Enron Corporation, a darling of Wall Street investors with $63.4 billion in assets, went bust. It was the largest bankruptcy in U.S. history. Some of the corporation’s executives, including the CEO and chief financial officer, went to prison for fraud and other offenses. Shareholders hit the company with a $40 billion lawsuit, and the company’s auditor, Arthur Andersen, ceased doing business after losing many of its clients.

It was also a black mark on the U.S. stock market. At the time, most investors didn’t see the prospect of massive financial fraud as a real risk when buying U.S.-listed stocks. “U.S. markets had long been the gold standard in transparency and compliance,” says Jack Ablin, founding partner at Cresset Capital and a veteran of financial markets. “That was a real one-two punch on credibility. That was a watershed for the U.S. public.”

The company’s collapse sent ripples through the financial system, with the government introducing a set of stringent regulations for auditors, accountants and senior executives, huge requirements for record keeping, and criminal penalties for securities laws violations. In turn, that has led in part to less choice for U.S. stock investors, and lower participation in stock ownership by individuals.

In other words, it was the little guy who suffered over the last two decades.

Americans lost trust in the stock market

The collapse of Enron gave many average Americans pause about investing. After all, if a giant like Enron could collapse, what investments could they trust? A significant number of Americans have foregone participating in the tremendous stock market gains seen over the last two decades. In 2020, a little more than half of the population (55%) owned stocks directly or through savings vehicles such as 401Ks and IRAs. That’s down from 60% in the year 2000, according to the Survey of Consumer Finances from the U.S. Federal Reserve.

That could have had a large financial impact on some folks. For instance, an investment of $1,000 in the S&P 500 at the beginning of 2000 would recently have been worth $4,710, including reinvested dividends. Wealthier people, who often employ professionals to handle their investments, were more likely to stick with their stocks, while middle class and poorer people couldn’t take the risk. Without doubt this drop in stock market participation has contributed to the growing levels of wealth inequality across the U.S.

It became harder for companies to IPO

While lack of trust in the market is a direct consequence of Enron’s mega fraud, the indirect consequences of government actions also seem to have hurt Main Street USA.

Immediately following the bankruptcy, Congress worked on the Sarbanes-Oxley legislation, which was meant to hold senior executives responsible for listed company financial statements. CEOs and CFOs are now held personally accountable for the truth of what goes on the income statement and balance sheet. The bill passed in 2002 and has been with us since. But it has also drawn harsh criticisms.

“The most important political response was Sarbanes-Oxley,” says Steve Hanke, professor of applied economics at Johns Hopkins University. “It was unnecessary, and it was harmful.”

In many ways, the legislation wasn’t needed because the Justice Department and the Securities Exchange Commission already had the powers to prosecute executives who cooked the financial books or at a minimum were less than transparent with the truth, Hanke says.

The direct result of the legislation was that public companies got dumped with a load of bureaucratic form-filling, and executives would be less likely to take on entrepreneurial risks, Hanke says. There is also much ambiguity in the law about what is or what isn’t allowed and what are the ultimate consequences of non-compliance. “You don’t know what you are facing in terms of penalties, so you back off of everything risky,” he says.

Quickly, that meant the stock market underwent two significant changes. First, fewer companies are listed now than since the 1970s. In 1996, during the dot-com bubble, there were 8,090 companies listed on stock exchanges in the U.S., according to data from the World Bank. That figure had fallen to 4,266 by 2019.

That drop was partially a reflection of the regulatory burden of companies wishing to go public, experts say. “It costs a lot of money to employ the securities attorneys needed for Sarbanes-Oxley,” says Robert Wright, a senior fellow at the American Institute of Economic Research and an economic historian. “Clearly, fewer companies can afford to meet all these requirements.”

Companies now wait under they are far larger before going public than they did before the Sarbanes-Oxley rules were introduced. Yahoo! went public with a market capitalization of $848 million in April 1996, and in 1995 Netscape got a valuation of $2.9 billion. Compare that to the $82 billion IPO valuation for ride share company Uber in 2019, or Facebook $104 billion IPO value in 2012.

Now, companies grow through investments that don’t require a public market listing and that don’t involve heavy bureaucratic costs. Instead, startups go to venture capital firms or private equity. The recent rise in the use of Special Acquisition Corporations (SPACs) is seen by some as a relatively easy way to skirt some of the burdensome regulations of listing stocks. However, SPACs do nothing to reduce ongoing costs or burden of complying with the Sarbanes-Oxley rules.

But when companies stay private longer, they spend more time without the public accountability required of listed companies. Former blood testing company Theranos famously remained private in a move some theorized was to avoid publicizing internal data. Because of the high barriers Sarbanes-Oxley placed on going public, the business world is now littered with large, private companies that don’t have to reveal their inner workings.

Delaying going public also affects Main Street because most individual investors cannot buy shares in companies that aren’t public. They haven’t been able to share in the profits from the speedy early-stage corporate growth that is typically seen in companies like Facebook and Uber.

Put simply, the Sarbanes-Oxley regulations have chased away some investing opportunities from the public market to the private ones. And in doing so have excluded small investors from participating—and gaining.

“Now smaller investors are shut out and all the big economic profits go to venture capitalists and the like,” Wright says. That, in many ways, is the legacy of Enron.

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enron us case study

The Rise and Fall of Enron

When a company looks too good to be true, it usually is..

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If you’re like most, you’ve been astonished, disillusioned and angered as you learned of the meteoric rise and fall of Enron Corp. Remember the company’s television commercial of not so long ago, ending with the reverberating phrase, “Ask why, why, why?” That question is now on everyone’s lips. The Enron case is a dream for academics who conduct research and teach. For those currently or formerly involved with the company, such as creditors, auditors, the SEC and accounting regulators, it’s a nightmare that will continue for a long time.  

Formal investigations of Enron are now under way, headed by the company’s board, the SEC, the Justice Department and Congress. The exact causes and details of the disaster may not be known for months. The purpose of this article is to summarize preliminary observations about the collapse, as well as changes in financial reporting, auditing and corporate governance that are being proposed in response by Big Five accounting firms, the AICPA and the SEC.


On the surface, the motives and attitudes behind decisions and events leading to Enron’s eventual downfall appear simple enough: individual and collective greed born in an atmosphere of market euphoria and corporate arrogance. Hardly anyone—the company, its employees, analysts or individual investors—wanted to believe the company was too good to be true. So, for a while, hardly anyone did. Many kept on buying the stock, the corporate mantra and the dream. In the meantime, the company made many high-risk deals, some of which were outside the company’s typical asset risk control process. Many went sour in the early months of 2001 as Enron’s stock price and debt rating imploded because of loss of investor and creditor trust. Methods the company used to disclose (or creatively obscure) its complicated financial dealings were erroneous and, in the view of some, downright deceptive. The company’s lack of transparency in reporting its financial affairs, followed by financial restatements disclosing billions of dollars of omitted liabilities and losses, contributed to its demise. The whole affair happened under the watchful eye of Arthur Andersen LLP, which kept a whole floor of auditors assigned at Enron year-round.


In 1985, after federal deregulation of natural gas pipelines, Enron was born from the merger of Houston Natural Gas and InterNorth, a Nebraska pipeline company. In the process of the merger, Enron incurred massive debt and, as the result of deregulation, no longer had exclusive rights to its pipelines. In order to survive, the company had to come up with a new and innovative business strategy to generate profits and cash flow. Kenneth Lay, CEO, hired McKinsey & Co. to assist in developing Enron’s business strategy. It assigned a young consultant named Jeffrey Skilling to the engagement. Skilling, who had a background in banking and asset and liability management, proposed a revolutionary solution to Enron’s credit, cash and profit woes in the gas pipeline business: create a “gas bank” in which Enron would buy gas from a network of suppliers and sell it to a network of consumers, contractually guaranteeing both the supply and the price, charging fees for the transactions and assuming the associated risks. Thanks to the young consultant, the company created both a new product and a new paradigm for the industry—the energy derivative.

Lay was so impressed with Skilling’s genius that he created a new division in 1990 called Enron Finance Corp. and hired Skilling to run it. Under Skilling’s leadership, Enron Finance Corp. soon dominated the market for natural gas contracts, with more contacts, more access to supplies and more customers than any of its competitors. With its market power, Enron could predict future prices with great accuracy, thereby guaranteeing superior profits.


Skilling began to change the corporate culture of Enron to match the company’s transformed image as a trading business. He set out on a quest to hire the best and brightest traders, recruiting associates from the top MBA schools in the country and competing with the largest and most prestigious investment banks for talent. In exchange for grueling schedules, Enron pampered its associates with a long list of corporate perks, including concierge services and a company gym. Skilling rewarded production with merit-based bonuses that had no cap, permitting traders to “eat what they killed.”

One of Skilling’s earliest hires in 1990 was Andrew Fastow, a 29-year-old Kellogg MBA who had been working on leveraged buyouts and other complicated deals at Continental Illinois Bank in Chicago. Fastow became Skilling’s protg in the same way Skilling had become Lay’s. Fastow moved swiftly through the ranks and was promoted to chief financial officer in 1998. As Skilling oversaw the building of the company’s vast trading operation, Fastow oversaw its financing by ever more complicated means.

As Enron’s reputation with the outside world grew, the internal culture apparently began to take a darker tone. Skilling instituted the performance review committee (PRC), which became known as the harshest employee-ranking system in the country. It was known as the “360-degree review” based on the values of Enron—respect, integrity, communication and excellence (RICE). However, associates came to feel that the only real performance measure was the amount of profits they could produce. In order to achieve top ratings, everyone in the organization became instantly motivated to “do deals” and post earnings. Employees were regularly rated on a scale of 1 to 5, with 5s usually being fired within six months. The lower an employee’s PRC score, the closer he or she got to Skilling, and the higher the score, the closer he or she got to being shown the door. Skilling’s division was known for replacing up to 15% of its workforce every year. Fierce internal competition prevailed and immediate gratification was prized above long-term potential. Paranoia flourished and trading contracts began to contain highly restrictive confidentiality clauses. Secrecy became the order of the day for many of the company’s trading contracts, as well as its disclosures.


Coincidentally, but not inconsequentially, the U.S. economy during the 1990s was experiencing the longest bull market in its history. Enron’s corporate leadership, Lay excluded, comprised mostly young people who had never experienced an extended bear market. New investment opportunities were opening up everywhere, including markets in energy futures. Wall Street demanded double-digit growth from practically every venture, and Enron was determined to deliver.

In 1996 Skilling became Enron’s chief operating officer. He convinced Lay the gas bank model could be applied to the market for electric energy as well. Skilling and Lay traveled widely across the country, selling the concept to the heads of power companies and to energy regulators. The company became a major political player in the United States, lobbying for deregulation of electric utilities. In 1997 Enron acquired electric utility company Portland General Electric Corp. for about $2 billion. By the end of that year, Skilling had developed the division by then known as Enron Capital and Trade Resources into the nation’s largest wholesale buyer and seller of natural gas and electricity. Revenue grew to $7 billion from $2 billion, and the number of employees in the division skyrocketed to more than 2,000 from 200. Using the same concept that had been so successful with the gas bank, they were ready to create a market for anything that anyone was willing to trade: futures contracts in coal, paper, steel, water and even weather.

Perhaps Enron’s most exciting development in the eyes of the financial world was the creation of Enron Online (EOL) in October 1999. EOL, an electronic commodities trading Web site, was significant for at least two reasons. First, Enron was a counterparty to every transaction conducted on the platform. Traders received extremely valuable information regarding the “long” and “short” parties to each trade as well as the products’ prices in real-time. Second, given that Enron was either a buyer or a seller in every transaction, credit risk management was crucial and Enron’s credit was the cornerstone that gave the energy community the confidence that EOL provided a safe transaction environment. EOL became an overnight success, handling $335 billion in online commodity trades in 2000.

The world of technology opened up the Internet, and the IPO market for technology and broadband communications companies started to take off. In January 2000 Enron announced an ambitious plan to build a high-speed broadband telecommunications network and to trade network capacity, or bandwidth, in the same way it traded electricity or natural gas. In July of that year Enron and Blockbuster announced a deal to provide video on demand to customers throughout the world via high-speed Internet lines. As Enron poured hundreds of millions into broadband with very little return, Wall Street rewarded the strategy with as much as $40 on the stock price—a factor that would have to be discounted later when the broadband bubble burst. In August 2000 Enron’s stock hit an all-time high of $90.56, and the company was being touted by Fortune and other business publications as one of the most admired and innovative companies in the world.


Enron incorporated “mark-to-market accounting” for the energy trading business in the mid-1990s and used it on an unprecedented scale for its trading transactions. Under mark-to-market rules, whenever companies have outstanding energy-related or other derivative contracts (either assets or liabilities) on their balance sheets at the end of a particular quarter, they must adjust them to fair market value, booking unrealized gains or losses to the income statement of the period. A difficulty with application of these rules in accounting for long-term futures contracts in commodities such as gas is that there are often no quoted prices upon which to base valuations. Companies having these types of derivative instruments are free to develop and use discretionary valuation models based on their own assumptions and methods.

The Financial Accounting Standards Board’s (FASB) emerging issues task force has debated the subject of how to value and disclose energy-related contracts for several years. It has been able to conclude only that a one-size-fits-all approach will not work and that to require companies to disclose all of the assumptions and estimates underlying earnings would produce disclosures that were so voluminous they would be of little value. For a company such as Enron, under continuous pressure to beat earnings estimates, it is possible that valuation estimates might have considerably overstated earnings. Furthermore, unrealized trading gains accounted for slightly more than half of the company’s $1.41 billion reported pretax profit for 2000 and about one-third of its reported pretax profit for 1999.


In the latter part of the 1990s, companies such as Dynegy, Duke Energy, El Paso and Williams began following Enron’s lead. Enron’s competitive advantage, as well as its huge profit margins, had begun to erode by the end of 2000. Each new market entrant’s successes squeezed Enron’s profit margins further. It ran with increasing leverage, thus becoming more like a hedge fund than a trading company. Meanwhile, energy prices began to fall in the first quarter of 2001 and the world economy headed into a recession, thus dampening energy market volatility and reducing the opportunity for the large, rapid trading gains that had formerly made Enron so profitable. Deals, especially in the finance division, were done at a rapid pace without much regard to whether they aligned with the strategic goals of the company or whether they complied with the company’s risk management policies. As one knowledgeable Enron employee put it: “Good deal vs. bad deal? Didn’t matter. If it had a positive net present value (NPV) it could get done. Sometimes positive NPV didn’t even matter in the name of strategic significance.” Enron’s foundations were developing cracks and Skilling’s house of paper built on the stilts of trust had begun to crumble.


In order to satisfy Moody’s and Standard & Poor’s credit rating agencies, Enron had to make sure the company’s leverage ratios were within acceptable ranges. Fastow continually lobbied the ratings agencies to raise Enron’s credit rating, apparently to no avail. That notwithstanding, there were other ways to lower the company’s debt ratio. Reducing hard assets while earning increasing paper profits served to increase Enron’s return on assets (ROA) and reduce its debt-to-total-assets ratio, making the company more attractive to credit rating agencies and investors.

Enron, like many other companies, used “special purpose entities” (SPEs) to access capital or hedge risk. By using SPEs such as limited partnerships with outside parties, a company is permitted to increase leverage and ROA without having to report debt on its balance sheet. The company contributes hard assets and related debt to an SPE in exchange for an interest. The SPE then borrows large sums of money from a financial institution to purchase assets or conduct other business without the debt or assets showing up on the company’s financial statements. The company can also sell leveraged assets to the SPE and book a profit. To avoid classification of the SPE as a subsidiary (thereby forcing the entity to include the SPE’s financial position and results of operations in its financial statements), FASB guidelines require that only 3% of the SPE be owned by an outside investor.

Under Fastow’s leadership, Enron took the use of SPEs to new heights of complexity and sophistication, capitalizing them with not only a variety of hard assets and liabilities, but also extremely complex derivative financial instruments, its own restricted stock, rights to acquire its stock and related liabilities. As its financial dealings became more complicated, the company apparently also used SPEs to “park” troubled assets that were falling in value, such as certain overseas energy facilities, the broadband operation or stock in companies that had been spun off to the public. Transferring these assets to SPEs meant their losses would be kept off Enron’s books. To compensate partnership investors for downside risk, Enron promised issuance of additional shares of its stock. As the value of the assets in these partnerships fell, Enron began to incur larger and larger obligations to issue its own stock later down the road. Compounding the problem toward the end was the precipitous fall in the value of Enron stock. Enron conducted business through thousands of SPEs. The most controversial of them were LJM Cayman LP and LJM2 Co-Investment LP, run by Fastow himself. From 1999 through July 2001, these entities paid Fastow more than $30 million in management fees, far more than his Enron salary, supposedly with the approval of top management and Enron’s board of directors. In turn, the LJM partnerships invested in another group of SPEs, known as the Raptor vehicles, which were designed in part to hedge an Enron investment in a bankrupt broadband company, Rhythm NetConnections. As part of the capitalization of the Raptor entities, Enron issued common stock in exchange for a note receivable of $1.2 billion. Enron increased notes receivable and shareholders’ equity to reflect this transaction, which appears to violate generally accepted accounting principles. Additionally, Enron failed to consolidate the LJM and Raptor SPEs into their financial statements when subsequent information revealed they should have been consolidated.


A very confusing footnote in Enron’s 2000 financial statements described the above transactions. Douglas Carmichael, the Wollman Distinguished Professor of Accounting at Baruch College in New York City, told the Wall Street Journal in November of 2001 that most people would be hard pressed to understand the effects of these disclosures on the financial statements, casting doubt on both the quality of the company’s earnings as well as the business purpose of the transaction. By April 2001 other skeptics arrived on the scene. A number of analysts questioned the lack of transparency of Enron’s disclosures. One analyst was quoted as saying, “The notes just don’t make sense, and we read notes for a living.” Skilling was very quick to reply with arrogant comments and, in one case, even called an analyst a derogatory name. What Skilling and Fastow apparently underestimated was that, because of such actions, the market was beginning to perceive the company with greater and greater skepticism, thus eroding its trust and the company’s reputation.


In February 2001 Lay announced his retirement and named Skilling president and CEO of Enron. In February Skilling held the company’s annual conference with analysts, bragging that the stock (then valued around $80) should be trading at around $126 per share.

In March Enron and Blockbuster announced the cancellation of their video-on-demand deal. By that time the stock had fallen to the mid-$60s. Throughout the spring and summer, risky deals Enron had made in underperforming investments of various kinds began to unravel, causing it to suffer a huge cash shortfall. Senior management, which had been voting with its feet since August 2000, selling Enron stock in the bull market, continued to exit, collectively hundreds of millions of dollars richer for the experience. On August 14, just six months after being named CEO, Skilling himself resigned, citing “personal reasons.” The stock price slipped below $40 that week and, except for a brief recovery in early October after the sale of Portland General, continued its slide to below $30 a share.

Also in August, in an internal memorandum to Lay, a company vice-president, Sherron Watkins, described her reservations about the lack of disclosure of the substance of the related party transactions with the SPEs run by Fastow. She concluded the memo by stating her fear that the company might “implode under a series of accounting scandals.” Lay notified the company’s attorneys, Vinson & Elkins, as well as the audit partner at Enron’s auditing firm, Arthur Andersen LLP, so the matter could be investigated further. The proverbial “ship” of Enron had struck the iceberg that would eventually sink it.

On October 16 Enron announced its first quarterly loss in more than four years after taking charges of $1 billion on poorly performing businesses. The company terminated the Raptor hedging arrangements which, if they had continued, would have resulted in its issuing 58 million Enron shares to offset the company’s private equity losses, severely diluting earnings. It also disclosed the reversal of the $1.2 billion entry to assets and equities it had made as a result of dealings with these arrangements. It was this disclosure that got the SEC’s attention.

On October 17 the company announced it had changed plan administrators for its employees’ 401(k) pension plan, thus by law locking their investments for a period of 30 days and preventing workers from selling their Enron stock. The company contends this decision had in fact been made months earlier. However true that might be, the timing of the decision certainly has raised suspicions.

On October 22 Enron announced the SEC was looking into the related party transactions between Enron and the partnerships owned by Fastow, who was fired two days later. On November 8 Enron announced a restatement of its financial statements back to 1997 to reflect consolidation of the SPEs it had omitted, as well as to book Andersen’s recommended adjustments from those years, which the company had previously “deemed immaterial.” This restatement resulted in another $591 million in losses over the four years as well as an additional $628 million in liabilities as of the end of 2000. The equity markets immediately reacted to the restatement, driving the stock price to less than $10 a share. One analyst’s report stated the company had burned through $5 billion in cash in 50 days.

A merger agreement with smaller cross-town competitor Dynegy was announced on November 9, but rescinded by Dynegy on November 28 on the basis of Enron’s lack of full disclosure of its off-balance-sheet debt, downgrading Enron’s rating to junk status. On November 30 the stock closed at an astonishing 26 cents a share. The company filed for bankruptcy protection on December 2.


Unquestionably, the Enron implosion has wreaked more havoc on the accounting profession than any other case in U.S. history. Critics in the media, Congress and elsewhere are calling into question not only the adequacy of U.S. disclosure practices but also the integrity of the independent audit process. The general public still questions how CPA firms can maintain audit independence while at the same time engaging in consulting work, often for fees that dwarf those of the audit. Companies that deal in special purpose entities and complex financial instruments similar to Enron’s have suffered significant declines in their stock prices. The scandal threatens to undermine confidence in financial markets in the United States and abroad.

In a characteristic move, the SEC and the public accounting profession have been among the first to respond to the Enron crisis. Unfortunately, and sadly reminiscent of financial disasters in the 1970s and 1980s, this response will likely be viewed by investors, creditors, lawmakers and employees of Enron as “too little, too late.”

In an “op-ed” piece for the Wall Street Journal on December 11, SEC Chairman Harvey Pitt called the current outdated reporting and financial disclosure system the financial “perfect storm.” He stated that under the current quarterly and annual reporting system, information is often stale on arrival and mandated financial disclosures are often “arcane and impenetrable.” To reassure investors and restore confidence in financial reporting, Pitt called for a joint response from the public and private sectors that included, among other things,

  • A system of “current” disclosures, supplementing and updating quarterly and annual information with disclosure of material information on a real-time basis.
  • Public company disclosure of significant current “trend” and “evaluative” data in addition to historical information.
  • Identification of “most critical accounting principles” by all public companies in their annual reports.
  • More timely and responsive accounting standard setting on the part of the private sector.
  • An environment of cooperation between the SEC and registrants that encourages public companies and their auditors to seek advice on disclosure issues in advance.
  • An effective and transparent system of self-regulation for the accounting profession, subject to SEC’s rigorous, but nonduplicative, oversight.
  • More proactive oversight by audit committees who understand financial accounting principles as well as how they are applied.

The CEOs of the Big Five accounting firms made a joint statement on December 4 committing to develop improved guidance on disclosure of related party transactions, SPEs and market risks for derivatives including energy contracts for the 2001 reporting period. In addition, the Big Five called for modernization of the financial reporting system in the United States to make it more timely and relevant, including more nonfinancial information on entity performance. They also vowed to streamline the accounting standard-setting process to make it more responsive to the rapid changes that occur in a technology-driven economy.

Since the Enron debacle, the AICPA has been engaged in significant damage control measures to restore confidence in the profession, displaying the banner “Enron: The AICPA, the Profession, and the Public Interest” on its Web site. It has announced the imminent issuance of an exposure draft on a new audit standard on fraud (the third in five years), providing more specific guidance than currently found in SAS no. 82, Consideration of Fraud in a Financial Statement Audit . The Institute has also promised a revised standard on reviews of quarterly financial statements, as well as the issuance, in the second quarter of 2002, of an exposure draft of a standard to improve the audit process. These standards had already been on the drawing board as part of the AICPA’s response to the report of the Blue Ribbon Panel on Audit Effectiveness, issued in 2000.

In late December the AICPA issued a tool kit for auditors to use in identifying and auditing related party transactions. While it breaks no new ground, the tool kit provides, in one place, an overview of the accounting and auditing literature, SEC requirements and best practice guidance concerning related party transactions. It also includes checklists and other tools for auditors to use in gathering evidence and disclosing related party transactions.

In January the AICPA board of directors announced that it would cooperate fully with the SEC’s proposal for new rules for the peer review and disciplinary process for CPA firms of SEC registrants. The new system would be managed by a board, a majority of which would be public members, enhancing the peer review process for the largest firms and requiring more rigorous and continuous monitoring. The staff of the new board would administer the reviews. In protest, the Public Oversight Board informed Pitt that it would terminate its existence in March 2002, leaving the future peer review process in a state of uncertainty. The SEC and the AICPA are now engaged in talks with the POB to reassure the board it will continue to be a vital part of the peer review process in the future.

The AICPA has also approved a resolution to support prohibitions that would prevent audit firms from performing systems design and implementation as well as internal audit outsourcing for public audit clients. While asserting that it does not believe prohibition of these services will make audits more effective or prevent financial failures, the board has stated it feels the move is necessary to restore public confidence in the profession. These prohibitions were at the center of the controversy last year between the profession and the SEC under the direction of former Chairman Arthur Levitt. Big Five CPA firms and the AICPA lobbied heavily and prevailed in that controversy, winning the right to retain these services and being required only to disclose their fees.

The impact of Enron is now being felt at the highest levels of government as legislators engage in endless debate and accusation, quarreling over the influence of money in politics. The GAO has requested that the White House disclose documents concerning appointments to President George W. Bush’s Task Force on Energy, chaired by Vice-President Dick Cheney, former CEO of Halliburton. The White House has refused, and the GAO has filed suit, the first of its kind in history. Congressional investigations are expected to continue well into 2002 and beyond. Lawmakers are expected to investigate not only disclosure practices at Enron, but for all public companies, concerning SPEs, related party transactions and use of “mark-to-market” accounting.

Kenneth Lay resigned as Enron’s CEO, under pressure from creditor groups. Lay, Skilling and Fastow still have much to explain. In addition, Enron’s board of directors, and especially the audit committee, will be in the “hot seat” and rightfully so.

The Justice Department opened a criminal investigation and formed a national task force made up of federal prosecutors in Houston, San Francisco, New York and several other cities to investigate the possibility of fraud in the company’s dealings. Interestingly, to illustrate how far-reaching Enron’s ties are to government and political sources at all levels, U.S. Attorney General John Ashcroft, as well as his entire Houston office, disqualified themselves from the investigation because of either political, economic or family ties.

It appears that 2002 is shaping up to be a year of unprecedented changes for a profession that is already coping with an identity crisis.


Arthur Andersen LLP, after settling two other massive lawsuits earlier in 2001, is preparing for a storm of litigation as well as a possible criminal investigation in the wake of the Enron collapse. Enron was the firm’s second-largest client. Andersen, who had the job not only of Enron’s external but also its internal audits for the years in question, kept a staff on permanent assignment at Enron’s offices. Many of Enron’s internal accountants, CFOs and controllers were former Andersen executives. Because of these relationships, as well as Andersen’s extensive concurrent consulting practice, members of Congress, the press and others are calling Andersen’s audit independence into question. Indeed, they are using the case to raise doubts about the credibility of the audit process for all Big Five firms who do such work.

So far, Andersen has acknowledged its role in the fiasco, while defending its accounting and auditing practices. In a Wall Street Journal editorial on December 4, as well as in testimony before Congress the following week, Joseph Berardino, CEO, was forthright in his views. He committed the firm to full cooperation in the investigations as well as to a leadership role in potential solutions.

Enron dismissed Andersen as its auditor on January 17, 2002, citing document destruction and lack of guidance on accounting policy issues as the reasons. Andersen countered with the contention that in its mind the relationship had terminated on December 2, 2001, the day the firm filed for Chapter 11 bankruptcy protection.

The fact that Andersen is no longer officially associated with Enron will, unfortunately, have little impact on forces now in place that may, in the eyes of some, determine the firm’s very future. Andersen is now under formal investigation by the SEC as well as various committees of both the U.S. Senate and House of Representatives of the U.S. Congress. To make matters worse for it, and to the astonishment of many, Andersen admitted it destroyed perhaps thousands of documents and electronic files related to the engagement, in accordance with “firm policy,” supposedly before the SEC issued a subpoena for them. The firm’s lawyers issued an internal memorandum on October 12 reminding employees of the firm’s document retention and destruction policies. The firm fired David B. Duncan, partner in charge of the Enron engagement, placed four other partners on leave and replaced the entire management team of the Houston office. Duncan invoked his Fifth Amendment rights against self-incrimination at a congressional hearing in January. Several other Andersen partners testified that Duncan and his staff acted in violation of firm policy. However, in view of the timing of the October 12 memorandum, Congress and the press are questioning whether the decision to shred documents extended farther up the chain of command. Andersen has suspended its firm policy for retention of records and asked former U.S. Senator John Danforth to conduct a comprehensive review of the firm’s records management policy and to recommend improvements.

In a move to bolster its image, Andersen also has retained former Federal Reserve Chairman Paul Volcker to lead an outside board that will advise it in making “fundamental change” in its audit process. Other members of the board include P. Roy Vagelos, former chairman and CEO of Merck & Co., and Charles A. Bowsher, current chairman of the Public Oversight Board, which disbanded in March. Volcker also named a seven-member advisory panel made up of prominent corporate and accounting executives that will review proposed reforms to the firm’s audit process.

Hindsight is so clear that it sometimes belies the complexity of the problem. Although fraud has not yet been proven to be a factor in Enron’s misstatements, some of the classic risk factors associated with management fraud outlined in SAS no. 82 are evident in the Enron case. Those include management characteristics, industry conditions and operating characteristics of the company. Although written five years ago, the list almost looks as if it was excerpted from Enron’s case:

  • Unduly aggressive earnings targets and management bonus compensation based on those targets.
  • Excessive interest by management in maintaining stock price or earnings trend through the use of unusually aggressive accounting practices.
  • Management setting unduly aggressive financial targets and expectations for operating personnel.
  • Inability to generate sufficient cash flow from operations while reporting earnings and earnings growth.
  • Assets, liabilities, revenues or expenses based on significant estimates that involve unusually subjective judgments such as…reliability of financial instruments.
  • Significant related party transactions.

These factors are common threads in the tapestry that is described of the environment leading to fraud. They were incorporated into SAS no. 82 on the basis of research into fraud cases of the 1970s and 1980s in the hope that auditors would learn from the past. Andersen will have to explain when and how it identified these factors, as well as how it responded and how it communicated with Enron’s board about them.

More important, Andersen will have to explain why it delayed notifying the SEC after learning of the internal Enron memo warning of problems. In addition, it will have to explain why the Houston office destroyed the thousands of documents related to the Enron audits for 1997 through 2000. Only time will tell, but it appears the firm is in serious trouble. In the end, and also characteristic of cases like this, the chief parties likely to benefit from this process are the attorneys.


The Enron story has produced many victims, the most tragic of which is a former vice-chairman of the company who committed suicide, apparently in connection with his role in the scandal. Another 4,500 individuals have seen their careers ended abruptly by the reckless acts of a few. Enron’s core values of respect, integrity, communication and excellence stand in satirical contrast to allegations now being made public. Personally, I had referred several of our best and brightest accounting, finance and MBA graduates to Enron, hoping they could gain valuable experience from seeing things done right. These included a very bright training consultant who had lost her job in 2000 with a Houston consulting firm as a result of a reduction in force. She has lost her second job in 18 months through no fault of her own. Other former students still hanging on at Enron face an uncertain future as the company fights for survival.

The old saying goes, “Lessons learned hard are learned best.” Some former Enron employees are embittered by the way they have been treated by the company that was once “the best in the business.” Others disagree. In the words of one of my former students who is still hanging on: “Just for the record, my time and experience at Enron have been nothing short of fantastic. I could not have asked for a better place to be or better people to work with. Please, though, remember this: Never take customer and employee confidence for granted. That confidence is easy to lose and tough—to impossible—to regain.”  

C. WILLIAM THOMAS, CPA, Ph.D. , is the J.E. Bush Professor of Accounting in the Hankamer School of Business at Baylor University in Waco. Mr. Thomas can be reached at [email protected] . This article originally appeared in the March/April 2002 issue of Today’s CPA , published by the Texas Society of CPAs.

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The Enron Scandal (2001)

enron us case study

Both of these buildings in downtown Houston, 1400 Smith Street and 1500 Louisiana Street, were formerly occupied by Enron. A ugust 2021 marked the 20 th anniversary of arguably the most notorious corporate-accounting scandal of all time. It may not have been the biggest in dollar terms, or even the most severe in terms of criminality and personnel held culpable, but the Enron Corp. scandal of 2001 remains perhaps the most impactful of all time. One of the largest companies in the United States collapsed virtually overnight, with the fallout of its malfeasance being billions of dollars stolen, thousands of jobs wiped out, dozens of criminal convictions and even one incident of suicide.

Indeed, when Enron filed for bankruptcy protection on December 2, 2001, it was the largest company to do so in US history until that point in time. It was also once the world’s largest energy-trading company, with a market value of up to $68 billion, before its collapse destroyed thousands of jobs and more than $2 billion in pension plans. The shockwaves the scandal sent across capital markets were seismic, shaking investor confidence to its core and changing the corporate and regulatory landscapes forever.

enron us case study

Jeffrey Keith Skilling was CEO of Enron Corporation at the time of the Enron scandal.

Enron was born in 1985 as a result of the merger between Houston Natural Gas Company and InterNorth Inc., with the chief executive officer (CEO) of Houston, Kenneth Lay, taking the reins of the newly formed entity. By 1990, Lay had hired Jeffrey K. (Jeff) Skilling, a partner at consulting firm McKinsey, which at the time was advising Enron. Two years later, Skilling had created a new accounting technique called mark-to-market (MTM) accounting, which was granted formal approval by the U.S. Securities and Exchange Commission (SEC) in 1992.

MTM accounting enables a company to adjust the value of its balance-sheet assets from their historical value to the current fair market value (FMV), and thus means that income can be calculated as an estimate of the present value of net future cash flow. Should a contract be worth $100 million over the coming 10 years, for instance, MTM accounting would enable a company to write $100 million in its books on the day the contract was signed, irrespective of whether the deal ultimately matched expectations. As such, Enron was able to inflate its present-day worth through its financial statements, substantially over and above what it had actually earned, and thus obfuscate the truth about its business performance.

This was perhaps no more clearly illustrated than when Enron Broadband Services, a subsidiary of Enron, partnered with Blockbuster in July 2000 in a 20-year deal to sell movie-on-demand services through its broadband network. In the pre-Netflix era, the prospect of delivering movies to people’s computers or televisions via broadband was a new and exciting one. And using MTM accounting meant that Enron could book all 20 years of forward projections from the deal—in this case, $110 million of estimated profit—to its financial statements for the mid-year 2000.

But the partnership ended up being terminated after movie studios expressed their opposition to Blockbuster providing such services. The failed deal and Blockbuster’s withdrawal, however, did not stop Enron from continuing to claim future profits and thus sell shares of the company at hugely inflated prices, despite the deal resulting in a loss. Arguably, this was the first major incident to kick off the external scrutiny into Enron’s dealings and its questionable MTM practices.

Eventually, the unit CEO, Joseph Hirko, and vice presidents F. Scott Yeager and Rex Shelby were charged with conspiracy, fraud, insider trading and money laundering related to those practices. And Kevin Howard, the former chief financial officer (CFO), and Michael W. Krautz, a former senior director of accounting, of Enron Broadband Services were charged with conspiracy and fraud tied to the fabrication of earnings stemming from the failed Blockbuster deal.

The company also used accounting tricks to misclassify loan transactions as revenues just before quarterly financial-reporting dates. For instance, they entered into a deal with Merrill Lynch in which the US bank bought Nigerian barges with a buyback guarantee from Enron just before its earnings deadline. Enron misreported this bridge loan as a true sale before buying the barges back a few months later. Merrill Lynch was eventually held culpable in November for its role in assisting Enron in its accounting fraud, with some of the bank’s executives spending almost a year in prison.

Special purpose entities (SPEs) played a significant role in Enron’s misdeeds. Dubbed as the “Raptors”, these SPEs were created by the company—specifically by CFO Andrew Fastow with the apparent blessing of Skilling, Lay and the board of directors—to protect itself against MTM losses from its equity investments. Once these stocks began performing poorly, Enron “sold” them into the Raptors—LJM Cayman. L.P. (LJM1) and LJM2 Co-Investment L.P. (LJM2)—to shore up the appearance of its financial statements. In other words, LJM1 and LJM2 were created purely for the purpose of acting as the external equity investor required for the SPEs being used by Enron.

Fastow stated much of this when he testified before the U.S. Congress in the aftermath of the scandal and also confirmed that he himself stood to “benefit greatly from the partnerships”; indeed, he ended up pocketing some $45 million in the profit from his activity. In January 2004, he pleaded guilty to two counts of fraud, agreed to a prison term of up to 10 years and forfeited $24 million. “I was being a hero for Enron,” he said repeatedly during the testimony. “We were using this to inflate our earnings.”

According to the US government, Enron’s board also approved moving an affiliated company, Whitewing, off the books while guaranteeing its debt with $1.4 billion in Enron’s stock and helping it obtain funding to purchase Enron’s assets. “From the Raptor transactions, and numerous others described in the Powers Report, Congressional testimony, and newspaper reports, Enron may have paid out well over $300 million—in the form of cash, investments, and Enron stock—to advisors and SPE equity holders in order to sustain its network of off–balance sheet financing entities,” noted The CPA Journal in 2003. “By comparison, the Financial Accounting Foundation spent just $22 million to generate and maintain its FASB [Financial Accounting Standards Board] and GASB [Government Accounting Standards Board] standards-setting programs. As a result, it is not difficult to see how determined companies can run rings around GAAP [generally accepted accounting principles], exploiting technicalities and loopholes to create financial statements that even the most sophisticated investors cannot understand.”

In terms of Enron’s path towards bankruptcy, the failed Blockbuster deal kicked off a gradually expanding wave of scrutiny into the company’s accounts from the financial press. The Texas Journal ran a story in September 2000 about the shortfalls and lack of transparency surrounding the MTM accounting techniques being increasingly adopted by the energy industry. The following March, the Fortune article “Is Enron Overpriced?” questioned the company’s stock valuation and posited that investors were unaware of how exactly Enron made money, while concerns voiced by the article’s author, Bethany McLean, were dismissed by Skilling when she tried to discuss her findings with him before publishing the article. And perhaps most infamously, on a conference call with Wall Street analyst Richard Grubman who pressed him into explaining more about Enron’s accounting practices, Skilling retorted, “Well uh…. Thank you very much, we appreciate it…. Asshole.” The response was met with considerable astonishment from the public.

By late October, following mounting complaints from analysts over the opacity of Enron’s financial statements, ratings agency Moody’s had lowered Enron’s credit rating to just two levels above junk status. A few days later, it was revealed to the public that the SEC had begun a formal investigation into Enron and its dealings with “related parties”.

By late November 2001, Enron’s stock price had plunged to less than $1 per share, in stark contrast to its mid-2000 peak of $90.75. The company was estimated to have $23 billion in liabilities from both outstanding debts and guaranteed loans, raising speculation that it would have to declare bankruptcy. Enron Europe, the holding company for Enron’s operations in Continental Europe, was the first to do so on November 30, a day before the board voted unanimously to file for Chapter 11 protection for the rest of the company.

At $63.4 billion in total assets, Enron’s was the largest corporate bankruptcy in US history until the WorldCom scandal just one year later. Around 4,000 jobs were lost, and almost two-thirds of the 15,000 employees’ savings plans that depended on Enron stock, which had been purchased at $83 at the start of the year, became worthless.

Additional fallout from the scandal was most directly suffered by Enron’s accounting firm, Arthur Andersen, which earned $52 million in audit and consulting fees in 2000, more than one-quarter of total audit fees generated by the company’s Houston office clients. Andersen was accused of failing to apply sufficient standards during its audits of Enron’s books and conducting itself in a way to simply receive its fees without sufficiently examining Enron’s accounting practices.​

“When confronted by evidence of Enron’s high-risk accounting, all of the Board members interviewed by the Subcommittee pointed out that Enron’s auditor, Andersen, had given the company a clean audit opinion each year,” the US Senate found . “None recalled any occasion on which Andersen had expressed any objection to a particular transaction or accounting practice at Enron, despite evidence indicating that, internally at Andersen, concerns about Enron’s accounting were commonplace. But a failure by Andersen to object does not preclude a finding that the Enron Board, with Andersen’s concurrence, knowingly allowed Enron to use high risk accounting and failed in its fiduciary duty to ensure the company engaged in responsible financial reporting.”

enron us case study

Sherron Watkins (left), Vice President of Corporate Development for the Enron Corporation, Skilling attorney Bruce Hiler (middle), and Jeffrey Skilling (right), former CEO of Enron, during the Senate Commerce hearing on the company’s bankruptcy | Photo Credit: Ferrell, Scott J – Library of Congress

It was eventually revealed that several conflicts of interest arose between Andersen and Enron. For example, Andersen’s Houston office, which conducted the audits, had the power to overrule any criticism levelled at Enron’s accounting practices by Andersen’s Chicago partner. It was also discovered that Enron’s management had applied considerable pressure on Andersen’s auditors to meet its earnings expectations. For instance, it would briefly hire other accounting companies to conduct some accounting tasks and thus give the impression that it would replace Andersen. The shredding of almost 30,000 e-mails and other files after Enron’s malpractice was made public also raised suspicion of widespread collusion between the two parties.

Ultimately, Andersen’s involvement with Enron caused the accounting firm to break up, again leading to thousands of job losses. “The evidence available to us suggests that Andersen did not fulfill its professional responsibilities in connection with its audits of Enron’s financial statements, or its obligation to bring to the attention of Enron’s Board (or the Audit and Compliance Committee) concerns about Enron’s internal contracts over the related-party transactions,” according to the (William C.) Powers Committee, which was appointed by Enron’s board to review its accounting practices in October 2001.

The 2002 enactment of the Sarbanes-Oxley Act did strengthen the oversight of accountants; reduced the potential for conflicts of interests faced by auditors, specifically by barring them from providing various consulting services to audit clients; and enhanced the SEC’s enforcement tools.

But it wasn’t until February 2004 that the SEC finally indicted Skilling, charging him with “violating, and aiding and abetting violations of, the antifraud, lying to auditors, periodic reporting, books and records, and internal controls provisions of the federal securities laws”.

“In this scandal, as in others, we are by now all too familiar with executives who bask in the attention that follows the appearance of corporate success, but who then shout their ignorance when the appearance gives way to the reality of corruption,” Stephen M. Cutler, director of the SEC’s Enforcement Division, said at the time. “Let there be no mistake that today’s enforcement action against Mr. Skilling places accountability exactly where it belongs.”

A federal jury in 2006 convicted him on 19 out of 28 criminal counts, including fraud, conspiracy and insider trading. He was sentenced to 24 years in prison and ordered to forfeit $45 million. Lay was convicted of all six counts of securities and wire fraud for which he had been tried, but he died in July 2006 before serving his sentence of potentially up to 45 years behind bars.

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  • Founding of Enron and its rise

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As the boom years came to an end and as Enron faced increased competition in the energy-trading business, the company’s profits shrank rapidly. Under pressure from shareholders, company executives began to rely on dubious accounting practices, including a technique known as “ mark-to-market accounting,” to hide the troubles. Mark-to-market accounting allowed the company to write unrealized future gains from some trading contracts into current income statements, thus giving the illusion of higher current profits. Furthermore, the troubled operations of the company were transferred to so-called special purpose entities (SPEs), which are essentially limited partnerships created with outside parties. Although many companies distributed assets to SPEs, Enron abused the practice by using SPEs as dump sites for its troubled assets. Transferring those assets to SPEs meant that they were kept off Enron’s books, making its losses look less severe than they really were. Ironically, some of those SPEs were run by Fastow himself. Throughout these years, Arthur Andersen served not only as Enron’s auditor but also as a consultant for the company.

In February 2001 Skilling took over as Enron’s chief executive officer , while Lay stayed on as chairman. In August, however, Skilling abruptly resigned, and Lay resumed the CEO role. By this point Lay had received an anonymous memo from Sherron Watkins, an Enron vice president who had become worried about the Fastow partnerships and who warned of possible accounting scandals.

The severity of the situation began to become apparent in mid-2001 as a number of analysts began to dig into the details of Enron’s publicly released financial statements. In October Enron shocked investors when it announced that it was going to post a $638 million loss for the third quarter and take a $1.2 billion reduction in shareholder equity owing in part to Fastow’s partnerships. Shortly thereafter the Securities and Exchange Commission (SEC) began investigating the transactions between Enron and Fastow’s SPEs. Some officials at Arthur Andersen then began shredding documents related to Enron audits.

As the details of the accounting frauds emerged, Enron went into free fall. Fastow was fired, and the company’s stock price plummeted from a high of $90 per share in mid-2000 to less than $12 by the beginning of November 2001. That month Enron attempted to avoid disaster by agreeing to be acquired by Dynegy. However, weeks later Dynegy backed out of the deal. The news caused Enron’s stock to drop to under $1 per share, taking with it the value of Enron employees’ 401(k) pensions, which were mainly tied to the company stock. On December 2, 2001, Enron filed for Chapter 11 bankruptcy protection.

enron us case study

Many Enron executives were indicted on a variety of charges and were later sentenced to prison. Notably, in 2006 both Skilling and Lay were convicted on various charges of conspiracy and fraud. Skilling was initially sentenced to more than 24 years but ultimately served only 12. Lay, who was facing more than 45 years in prison, died before he was sentenced. In addition, Fastow pleaded guilty in 2006 and was sentenced to six years in prison; he was released in 2011.

Arthur Andersen also came under intense scrutiny, and in March 2002 the U.S. Department of Justice indicted the firm for obstruction of justice . Clients wanting to assure investors that their financial statements could meet the highest accounting standards abandoned Andersen for its competitors. They were soon followed by Andersen employees and entire offices. In addition, thousands of employees were laid off. On June 15, 2002, Arthur Andersen was found guilty of shredding evidence and lost its license to engage in public accounting. Three years later, Andersen lawyers successfully persuaded the U.S. Supreme Court to unanimously overturn the obstruction of justice verdict on the basis of faulty jury instructions. But by then there was nothing left of the firm beyond 200 employees managing its lawsuits.

In addition, hundreds of civil suits were filed by shareholders against both Enron and Andersen. While a number of suits were successful, most investors did not recoup their money, and employees received only a fraction of their 401(k)s.

The scandal resulted in a wave of new regulations and legislation designed to increase the accuracy of financial reporting for publicly traded companies. The most important of those measures, the Sarbanes-Oxley Act (2002), imposed harsh penalties for destroying, altering, or fabricating financial records. The act also prohibited auditing firms from doing any concurrent consulting business for the same clients.

Brian Cruver, an Enron employee, wrote Anatomy of Greed: The Unshredded Truth from an Enron Insider (2002), which was adapted as the TV movie The Crooked E (2003). Enron: The Smartest Guys in the Room (2005) is a documentary film about Enron’s rise and fall.

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Ethical Lessons of the Enron Verdict from Wharton’s Thomas Dunfee

June 7, 2006 • 13 min read.

On May 25, a federal jury convicted former Enron CEO Kenneth Lay and former Enron president Jeffrey Skilling on conspiracy and fraud charges, with sentencing to be decided on September 11. As has been repeatedly noted in press coverage of this trial, Enron is the incredible story of a once powerful company done in by a group of top executives whose greed and fraud was breathtaking even by post dot-com standards. But it is by no means the only high-profile criminal trial in recent days, nor is it likely to be the last case brought by the government against CEOs who abuse their positions, their stockholders, their employees and the public trust. Thomas Dunfee, chairman of Wharton's legal studies and business ethics department, and an expert on social contracts and the social responsibility of business, talked to Knowledge at Wharton's Mukul Pandya and Robbie Shell about the Enron verdict.

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Enron Case study

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This Enron case study presents our own analysis of the spectacular rise and fall of Enron. It is the first in a new series assessing organisations against ACG’s Golden Rules of corporate governance and applying our proprietary rating tool.

As we say in our business ethics examples homepage introducing this series, the first and most critical rule is an ethical approach, and this should permeate an organisation from top to bottom. We shall therefore always start with an assessment of the ethical approach of the organisation. The way this creates the culture determines the performance in relation to the other four Rules.

The Enron case study: history, ethics and governance failures

Introduction: why enron.

Why pick Enron? The answer is that Enron is a well-documented story and we can apply our approach with the great benefit of hindsight to show how the end result could have been predicted. It is also a good example to illustrate how ethics drives culture which in turn pushes the ethical boundaries and is a key influence on all the four other key elements of good corporate governance.

Hence, in advance of using our own membership for the survey input we can apply the very detailed findings from the post crash dissection of Enron. Readers who are interested can go to  Wikipedia  and burrow into the history of Enron and its major players. They can also study the various accounts that have been written and which are referred to in Wikipedia. We particularly commend “ The Smartest Guys in the Room ”, the story of Enron’s rise and fall, by Bethany McLean and Peter Elkind, and we gratefully acknowledge the valuable insights we have drawn from this fascinating book in producing our Enron case study.

Below is a brief résumé of Enron’s spectacular rise in fifteen years to a market valuation of nearly $100bn and its precipitous collapse. We have prepared a detailed history (around 20,000 words) with our own annotations, which will soon be available as an ebook for those who would like to draw their own conclusions. We have also applied our proprietary survey tool to Enron and imagined how the various stakeholder groups might have responded to a business ethics survey at a critical time in Enron’s history, mid 2000, eighteen months before it suddenly collapsed. The results of this survey are summarised below.

History of Enron

Enron was created in 1986 by Ken Lay to capitalise on the opportunity he saw arising out of the deregulation of the natural gas industry in the USA. What started as a pipelines company was transformed by the vision of a McKinsey consultant, Jeff Skilling, who had the idea of applying models used in the financial services industry to the deregulated gas industry.

He persuaded Enron to set up a Gas Bank through which buyers and sellers of natural gas could transact with each other using an intermediary (Enron) whose contractual arrangements would provide both parties with reliability and predictability regarding pricing and delivery. Enron duly recruited him to run this business and he rapidly built up a major gas trading operation through the early nineties.

During this time Enron was extending its pipeline operations into a wider power supply business, initially in the USA and then on an international scale, completing a large plant at Teesside in the UK and contracting to build a huge plant near Mumbai in India. In due course it had deals all round the globe, from South America to China. The hard driving expansion of Enron’s power business worldwide created a global reputation for Enron.

San Francisco, California. The US West Coast was an early target for Enron's aggressive and misguided expansion.

San Francisco, California. The US West Coast was an early target for its aggressive and misguided expansion.

Skilling’s vision was to transform Enron into a giant, asset-light operation, trading power generally and his next target was trading electricity. Lay was lobbying Washington hard to deregulate electricity supply and in anticipation he and Skilling took Enron into California, buying a power plant on the west coast.

Enron’s national reputation rested on the rapid expansion of its domestic business and its steadily growing revenue and earnings from trading. So on the back of his track record, Skilling was appointed Chief Operating Officer by Ken Lay and he then embarked upon transforming the whole of Enron to reflect his vision.

Observing the dotcom boom, Skilling decided Enron could create a business based on a broadband network which could supply and trade bandwidth and he set out to build this at a great pace.

However, the experiment in deregulation in California didn’t work well and in due course was reversed with recriminations all round. Moreover, the international business expansion wasn’t underpinned by adequate administration and many of the contracts later turned bad.

So Enron then took the decision to build on its international presence by becoming a global leader in the water industry and bought a big water company in the UK, following it up with a big deal in Argentina.

At this point, around 2000, Enron’s reputation was still riding high and Lay and Skilling were looked up to as visionary thinkers and top business leaders.

However, as we see elsewhere in this case study, the rapid expansion had run well ahead of Enron’s ability to fund it, and to address the problem, it had secretly created a complex web of off-balance sheet financing vehicles. These, unwisely, were ultimately secured, and hence dependent, on Enron’s rapidly rising share price.

Also, its hard driving culture was underpinned by incentive schemes which promised, and delivered, huge rewards in compensation packages to outstanding performers. The result was that, to achieve results, aggressive accounting policies were introduced from an early stage. In particular, the use of mark to market valuation on contracts produced artificially large earnings, disguising for some years underlying poor profitability in major parts of the business.

This, of course, meant that Enron was not generating adequate cashflow, while spending extravagantly on expansion, and eventually it blew up suddenly and dramatically. Colleagues of this author who met Lay and had dealings with Enron confirm that there was scepticism in the market about Enron’s profitability and its cash position. Suspicions grew that Enron’s earnings had been manipulated and in late summer 2001 it emerged that its Chief Finance Officer had privately made himself rich at Enron’s expense through the off-balance sheet vehicles. About this time the dotcom boom ended suddenly and for Enron, this coincided with the international power business going radically wrong, the broadband business having to be shut down, the water business collapsing and the electricity services business getting into serious trouble in California. Enron’s share price started to slide and Skilling, appointed Chief Executive Officer in January 2001, resigned in August.

Enron’s share price then rapidly declined, triggering repayment clauses in the financing vehicles which Enron couldn’t handle. Its credit rating went to junk status, which caused the share price to collapse and triggered further crystallising of debt obligations. Banks refused further finance, suppliers refused to supply and customers stopped buying.

At the beginning of December 2001, Enron filed for the biggest bankruptcy the USA had yet seen.

This, in turn, took down one of the largest accounting firms in the world, Arthur Andersen, which was deemed to have so compromised its professional standards in its dealings with its client Enron that it was in many ways complicit in Enron’s criminal behaviour.

The second half of this Enron case study assesses business ethics and the impact on corporate governance, as measured against our Five Golden Rules.

Ethical assessment

Enron didn’t start out as an unethical business. As we have seen in this case study, what introduced the virus was the pursuit of personal wealth via very rapid growth. This led to the introduction of quite extreme incentive schemes to attract and motivate very bright and driven people, which, in turn, led to an unhealthy focus on short term earnings.

The next step was, naturally, to look at how earnings could be massaged to achieve the aggressive revenue and earnings targets. Since the massaged figures for growth in earnings still left a shortfall in cash, Enron quickly maxed out on its borrowing abilities.

But issuing more equity would have hurt the share price, on which most of the incentives were based. So schemes had to be created to produce funding secretly and this funding had to be hidden. In this way, an amoral and unethical culture developed in Enron in which customers, suppliers and even colleagues were misled and exploited to achieve targets. And the top management, who were rewarding themselves with these same incentive schemes, boasted that a pure, market-driven ethos was propelling Enron to greatness and deluded themselves that this equated to ethical behaviour. Lay even lectured the California authorities, whom Enron was cheating, that Enron was a model of business ethics.

Finally, the respected Arthur Andersen allowed greed for fees to over-rule the strong business ethics tradition of its founder and caused it to succumb to bending and suspending its professional standards, with fatal results.

Impact on Corporate Governance

Our five Rules of Good Corporate Governance start with the need for an ethical culture. Having established that Enron’s culture became progressively more deficient in this regard, let’s consider briefly the impact of this failure in business ethics on the other Rules.

Clear goal shared by all key stakeholders

Lay and, particularly Skilling, engendered in all the staff of Enron the goal of driving up the share price to the virtual exclusion of all else. The goal of achieving a long term satisfaction from a stable customer base took a distant second place to signing up deals. In California, the customers were deliberately exploited by the traders to the maximum extent their ingenuity could achieve. Even internally, the Chief Finance Officer’s funding scheme was designed to make him rich at his employer’s expense.

Strategic management

As a McKinsey consultant specialising in strategy, Skilling had a very clear vision, at least initially, of what he wanted Enron to achieve. However, he wasn’t interested in management per se and allowed operational management to wither. But his vision of a huge trading enterprise wasn’t carried down to the next level of developing and implementing practical business plans, as evidenced by his crazy launch into broadband, a field in which he had no personal knowledge or experience and in which Enron had almost no capability or likelihood of raising the funds required to implement the project

Organisation resourced to deliver

Skilling became COO on the departure of a very tough and experienced predecessor. Even at that point, Enron had been expanding at a rate which outran its ability to set up appropriate and adequate administrative systems and controls. Added to which it had always been short of funds. Skilling’s lack of interest in operational management meant that on his appointment at COO, he made a poor situation much worse by making bad managerial appointments. His focus on rapid growth incentivised by very generous compensation schemes, and with inadequate spending controls, created a totally dysfunctional organisation.

Transparency and accountability

From the early stages, Enron’s focus on earnings and share price growth and the related financial incentives led to a necessary lack of transparency as the figures were fiddled.. One could argue that Enron felt very much accountable to their shareholders for delivering consistent above average growth in Enron’s market capitalisation. However, this growth was achieved by subterfuge and deception. Certainly the dealings in California were as far from transparent as it was possible to be.

Finally, we bring a unique perspective to this Enron case study by using our proprietary survey tool, the ACGi, to rate the company, as at June 2000, and drawing conclusions from the results.

Conclusion and rating by our Survey tool

The flaws in Enron should have been spotted from early on, and indeed were periodically commented on by various observers from the early nineties onward. If independent ethical and corporate governance surveys had been conducted by independent parties they would have highlighted the growing problems. To illustrate, consider the hypothetical survey summarised in the following chart.

The scores out of ten (high is good) result from a set of questions which aim at deriving an independent, unbiased view from the interviewees, based on observations of corporate behaviour. What we have called the “sniff test” represents the personal view of the interviewee and would take into account their gut feel about the corporation and its management and owners. The highlighted scores would point the observer to clear problem areas.

ACG Enron Ethical Rating Scores

Click image to enlarge

One would conclude from this survey in June 2000 that:

  • neither customers, suppliers, financiers nor local communities rated Enron’s morality in terms of business ethics
  • customers and local communities thought they were breaking regulations
  • customers and suppliers thought they were probably bending their own rules
  • customers, shareholders, suppliers, financiers and local communities thought they were not truly honest.

It is clear with the benefit of hindsight that what started out as an imaginative and ground-breaking idea, which transformed the natural gas supply industry, rapidly evolved into a megalomaniac vision of creating a world-leading company. Intellectual self confidence mutated into contempt for traditional business models and created an environment in which top management became divorced from reality. The obsessive focus on driving the share price obscured the lack of basic controls and benchmarks and the progressive dishonesty in generating revenue and earnings figures in order to deceive the stock market led to the management deceiving themselves about the true situation.

Right up to nearly the end, Enron complied with all its regulatory requirements. The failings in these regulations led directly to Sarbanes-Oxley. But all the extra reporting in SarBox didn’t prevent the global financial meltdown in 2008 as the banks gamed the regulatory system. Now we have Dodd-Frank. What we actually need is independent Corporate Governance surveys.

If you found this summary useful, you may be interested in our full ebook :

  • 52 pages of detailed analysis of the  Enron scandal
  • An annotated walk-through of the history and ethics of the company
  • Detailed explanations of the governance failures leading to the scandal
  • Guidance for students of corporate governance
  • Annexe with lessons for setting up stakeholder research 

You will also get a FREE version of our rating tool to adjust the scores according to your own assessment of the information presented in the full Enron Case Study.

If you have any comments or experience of Enron, please leave a contribution using the comments feature at the bottom of this page.

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Supreme Court Says Prosecutors Overstepped With Jan. 6 Charge

The ruling that the Justice Department misused a 2002 law in charging a pro-Trump rioter who entered the Capitol could have an impact on hundreds of other cases, including one against Donald Trump.

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People waving flags and standing on the steps of the U.S. Capitol on Jan. 6, 2021.

By Adam Liptak

Adam Liptak has reported on the Supreme Court since 2008.

  • June 28, 2024

The Supreme Court ruled on Friday that federal prosecutors had improperly used an obstruction law to prosecute some members of the pro-Trump mob that stormed the Capitol on Jan. 6, 2021.

The ruling could affect the prosecutions of hundreds of rioters out of the more than 1,400 who have been charged with an array of offenses for taking part in the effort to block certification of the 2020 election results.

It could also have an effect on part of the federal case against former President Donald J. Trump accusing him of plotting to overturn his 2020 loss at the polls. But the precise impact on those cases will not become clear until trial courts review them in light of the Supreme Court’s ruling.

Prosecutors had argued that the law applied to efforts to obstruct an “official proceeding” — the joint session of Congress that took place on Jan. 6, 2021, to certify the Electoral College results.

But Chief Justice John G. Roberts Jr., writing for the majority, read the law narrowly, saying it applied only when the defendant’s actions impaired the integrity of physical evidence.

Lower courts will now apply that strict standard, and it may lead them to dismiss charges against some defendants, although most of those charged or convicted under the obstruction law also face other charges.

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Watch CBS News

Supreme Court limits scope of obstruction charge levied against Jan. 6 defendants, including Trump

By Melissa Quinn

Updated on: June 28, 2024 / 7:58 PM EDT / CBS News

Washington — The Supreme Court on Friday ruled in favor of a former Pennsylvania police officer who was charged with obstructing an official proceeding after he entered the U.S. Capitol building on Jan. 6, 2021, and narrowed the Justice Department's use of a federal obstruction statute leveled against scores of people who breached the building where Congress had convened to count state electoral votes.

The court ruled 6-3 in finding that to prove a violation of the obstruction law, the government must show that the defendant impaired the availability or integrity of records, documents or other objects used in an official proceeding. Justice Ketanji Brown Jackson joined five conservatives in the majority, while Justice Amy Coney Barrett sided with the two other liberals.

The case was sent back to the lower court for further proceedings, and the court said it can assess the sufficiency of the obstruction charge brought against defendant Joseph Fischer in light of its ruling.

Writing for the court, Chief Justice John Roberts said that accepting the Justice Department's reading of the law would give prosecutors "broad discretion to seek a 20-year maximum sentence for acts Congress saw fit to punish only with far shorter terms of imprisonment."

Jan. 6 cases

The Supreme Court's decision could affect the ongoing prosecutions of nearly 250 defendants charged with obstruction for their participation in the Jan. 6 assault. It could also upend cases that have already been adjudicated, since those who were convicted of violating the obstruction statute or pleaded guilty could seek resentencing, withdraw their pleas or ask for new trials. There are 52 cases in which a defendant was convicted and sentenced on charges where the obstruction count was the sole felony, and of those, 27 are currently incarcerated, according to the Justice Department.

Trump supporters gather on the West Front of the U.S. Capitol on Wednesday, Jan. 6, 2021, in Washington, D.C.

Crucially, the ruling could also impact the federal prosecution of former President Donald Trump, who is facing charges stemming from an alleged scheme to overturn the results of the 2020 presidential election. The obstruction statute and conspiracy to obstruct an official proceeding are among the four counts Trump faces in the case brought by special counsel Jack Smith. Trump has pleaded not guilty to all charges.

While the impact on the Supreme Court's ruling on Trump's case was not immediately clear, the former president could ask a federal district court to toss out the two obstruction-related counts as a result. Smith told the Supreme Court in a filing in another case that regardless of the ruling in Fischer's case, the obstruction charges against Trump are still valid because he is alleged to have organize false slates of electors, which involves documents.

The justices are still weighing a bid by Trump to have the entire indictment dismissed on the grounds of presidential immunity, though they have yet to issue a decision. The special counsel's office declined to comment on Friday's ruling.

Attorney General Merrick Garland said he was "disappointed" by the decision, but said it would have a minimal impact on Jan. 6 cases.

"There are no cases in which the Department charged a January 6 defendant only with the offense at issue in Fischer. For the cases affected by today's decision, the Department will take appropriate steps to comply with the Court's ruling," Garland said in a statement. "We will continue to use all available tools to hold accountable those criminally responsible for the January 6 attack on our democracy."

Fischer v. U.S.

The law at the center of the case was passed in the wake of the Enron accounting fraud scandal and makes it a crime to "corruptly" obstruct or impede an official proceeding. The statute is typically used in cases that involve evidence tampering, since its first provision is focused on documents. But after the Jan. 6 attack, federal prosecutors leveled the obstruction charge against more than 350 defendants who allegedly entered the Capitol after Congress had convened to certify the election results.

More than 1,400 people have been charged in connection with the Jan. 6 assault. The vast majority — 82% — were not charged with violating the obstruction statute, according to the Justice Department.

One of those defendants who was charged is Fischer, who faced seven counts, including assaulting a police officer, disorderly conduct and corruptly obstructing an official proceeding. Violators of the obstruction statute face up to 20 years in prison.

Fischer moved to dismiss the obstruction count, and a federal district judge ruled that nothing in the indictment alleged that he "took some action with respect to a document, record, or other object" to obstruct the congressional proceedings.

That judge, U.S. District Judge Carl Nichols, was the only one out of 15 hearing Jan. 6 cases in Washington who adopted a narrow reading of the law.

The federal appeals court in Washington, though, ruled against Fischer in a divided decision last year. He then appealed to the Supreme Court, and Fischer's case marked the first in which the justices confronted the aftermath of the Jan. 6 attack.

Writing for the court, Roberts noted the motivation behind enacting the obstruction statute — to close a gap in the law exposed by the Enron scandal — and said it would be "peculiar" if Congress hid away in the second part of the measure a "catchall provision that reaches far beyond document shredding and similar scenarios that prompted the legislation in the first place."

The "better conclusion," the chief justice said, is that Congress designed the statute to encompass other forms of evidence and other means of impairing its integrity beyond those it specified.

"Given that [the provision] was enacted to address the Enron disaster, not some further flung set of dangers, it is unlikely that Congress responded with such an unfocused and 'grossly incommensurate patch,'" Roberts wrote for the court. 

But Barrett, in dissent, said the obstruction law is a broad provision and argued that while the events like Jan. 6 were not its target, statutes often extend further than the initial problem they were intended to solve.

"Joseph Fischer allegedly participated in a riot at the Capitol that forced the delay of Congress's joint session on January 6th. Blocking an official proceeding from moving forward surely qualifies as obstructing or impeding the proceeding by means other than document destruction," she wrote. "Fischer's alleged conduct thus falls within [the law's] scope.

She was joined by Justices Sonia Sotomayor and Elena Kagan.

On the heels of the Supreme Court's ruling, at least one judge on the U.S. District Court in Washington, D.C., moved quickly to schedule additional proceedings in some cases of Jan. 6 defendants who have been sentenced for violating the obstruction law. One of those involves the first defendant to be convicted in a jury trial, Guy Reffitt, who was sentenced to 87 months in prison. Reffitt was found guilty of obstructing an official proceeding and other offenses, and the judge overseeing his case has called for more proceedings in light of the Supreme Court's decision.

The legal fight over the obstruction law was one of three cases before the court in its current term with implications for Trump. In arguing that the obstruction charges against Trump would not be impacted by a ruling in this case, Smith pointed to his claims that Trump deceitfully organized fake slates of electors in seven battleground states and urged state officials to send the false certificates to Congress. The creation of those documents, Smith said, "satisfies an evidence-impairment interpretation." 

Robert Legare, Scott MacFarlane and Andres Triay contributed reporting.

Melissa Quinn is a politics reporter for CBSNews.com. She has written for outlets including the Washington Examiner, Daily Signal and Alexandria Times. Melissa covers U.S. politics, with a focus on the Supreme Court and federal courts.

More from CBS News

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Wisconsin Supreme Court allows expanded use of ballot drop boxes

Kansas Supreme Court rejects 2 anti-abortion laws

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Jan. 6 US Capitol attack: What the Supreme Court's ruling means for riot cases

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Sarah N. Lynch is the lead reporter for Reuters covering the U.S. Justice Department out of Washington, D.C. During her time on the beat, she has covered everything from the Mueller report and the use of federal agents to quell protesters in the wake of George Floyd’s murder, to the rampant spread of COVID-19 in prisons and the department's prosecutions following the Jan. 6 attack on the U.S. Capitol.

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    Fischer v. U.S. The law at the center of the case was passed in the wake of the Enron accounting fraud scandal and makes it a crime to "corruptly" obstruct or impede an official proceeding.

  30. Jan. 6 US Capitol attack: What the Supreme Court's ruling means for

    The U.S. Supreme Court's ruling on Friday that federal prosecutors erred in how they charged a man for his role in the Jan. 6, 2021, assault on the U.S. Capitol began to take effect on some of the ...