Enron Engulfs America

How could Enron go bankrupt — and why did Arthur Andersen help cover up?

January 18, 2002

How could Enron go bankrupt — and why did Arthur Andersen help cover up?

First, Enron’s shocking bankruptcy on December 2 hit the headlines. Now, a growing scandal surrounding Arthur Andersen’s handling of Enron’s books is in the news. The Enron-Arthur Anderson fiasco has turned into a major media feeding frenzy and a major embarassment to the entire U.S. business and political establishment.

How big was Enron in the energy industry?

Until the current crisis, Enron handled one-fifth of the nation’s electricity and natural gas sales.

(Washington Post)

What did Enron have to say about its business plan?

“Our business is not a black box. It’s very simple to model. People who raise questions are people who have not gone through it in detail.”

(Jeff Skilling, former Enron CEO, February 2001)

Could you repeat that?

“We don’t want anyone to know what’s on those books. We don’t want to tell anyone where we’re making money.”

(Andrew S. Fastow, Enron’s chief financial officer in March 2001)

So what happened to this goliath?

In its chapter 11 filing on December 2, Enron listed $13.15 billion in debt. When combined with obligations of its 13 subsidiaries, its debt totals $31.24 billion. The company has an additional $27 billion in off-balance sheet and contingent liabilities, for a total of $58.24 billion.

(Wall Street Journal)

What did Enron’s books look like before the crisis?

In its 2000 annual report, Enron reported a total net income of $979 million dollars since 1997.

(Enron)

Is the Enron bankruptcy a big deal?

The Enron bankruptcy filing is the largest ever in the United States. The list of creditors attached to Enron’s chapter 11 filing is 54 pages long.

(Wall Street Journal)

Were there any clues that Enron’s books were a little fishy?

In 2001, Enron was on track to earn $200 billion in sales with only 21,000 employees. That works out to revenues of almost $9 million per employee — far more than at other large companies.

(New York Times)

What did Arthur Andersen have at stake?

In 2000, Enron paid Andersen $52 million, including $27 million for consulting services, making Enron Andersen’s second-largest U.S. client.

(Wall Street Journal)

How did Arthur Andersen’s accounting practices add to Enron’s bottom line?

The current crisis stems from the “immaterial” audit adjustments to Enron’s bookkeeping suggested by Arthur Andersen, which added up to nearly half of Enron’s net income back in 1997(!).

(Wall Street Journal)

Well, did anyone profit from Enron?

Enron CEO Kenneth Lay reportedly reaped some $300 million over the past decade from the exercise of his stock options.

(Barron’s)

What do other accounting firms think of Arthur Andersen’s troubles?

“The Big Five are silent about [Andersen’s troubles] because they are eager to become the Big Four.” (New York Times columnist William Safire)

(New York Times)