Enron hid debt in hundreds of shell companies to look profitable — then imploded

By 2000, Enron reported over $100 billion in revenue and was ranked among the largest companies in America, admired as endlessly innovative. Much of that was accounting. Under CEO Jeffrey Skilling, Enron had adopted mark-to-market accounting, booking the estimated future profits of long-term contracts as income the day they were signed — whether or not any cash ever arrived. When real cash flow fell short of the booked profits, the company had to keep signing bigger deals just to keep the numbers growing.

To hide the debt this machine generated, CFO Andrew Fastow built hundreds of 'special purpose entities' — shell partnerships with names like Chewco, Whitewing and the Raptors. Enron transferred assets and losses into them, keeping billions of liabilities off its balance sheet while using its own stock as collateral. The board even waived its ethics code so Fastow could personally run and profit from some of these vehicles. Auditors Arthur Andersen, earning almost as much in consulting as audit fees, signed off.

The scheme unraveled in autumn 2001. When the SPE structures had to be unwound, Enron restated years of earnings and disclosed a $1.2 billion reduction in shareholder equity; it reported a $618 million quarterly loss on October 16. The stock, which had traded above $90, fell to under a dollar. Enron filed for Chapter 11 bankruptcy on December 2, 2001 — the largest in US history at the time — wiping out roughly $70 billion in market value and billions more in employee pensions.