In June of 2001, Jeffrey Skilling was referred to as the “Number 1 CEO in the entire country” and the company that he represented, Enron Corporation, was considered to be “America’s most innovative company (Hamburger, 2002).” A short Six months later, the company filed for bankruptcy and took $60 billion worth of shareholder money with them. Enron’s fraudulent use of Special Purpose Entities, better known as SPEs, enabled them to remove items from their balance sheet in pursuit of maintaining equity stability in addition to raising capital without negatively affecting their credit, or bond, rating. Within this issue will be an examination of the usage of SPEs by Enron and what accounting changes have been made to diminish the potential for fraud.
A Detailed Look into Enron’s Fraudulent Use of Off Balance Sheet Special Purpose Entities
In December of 2001, Enron Corporation, who was once the media darling and corporate powerhouse, filed for Chapter 11 Bankruptcy. This was considered to be one of the biggest corporate bankruptcies of all time, and it stunned virtually everyone in the financial world. Investors were left out in the cold, with millions losing their life’s savings in addition to their retirement funds and pensions. Analysts were dumfounded after news of the fall of a company whom they recently validated as a ‘strong buy,’ dominated the airwaves. There was speculation that several of its top corporate executives could possibly spend time in jail for their involvement in sophisticated fraudulent account schemes, something that later occurred.
During the mid to late nineties, Enron Corporation began to grow at an unbelievably rapid pace. They experienced an $87 million increase in revenue over a four year period, beginning in 1996. They were recognized as an innovative company, one of which did not limit themselves to any one business or industry. In 2002, their four business lines were:
1. Energy Wholesale Services (fueled by...