Enron was a wealthy and powerful energy-services corporation based in Houston, TX that collapsed in late 2001 amid an investigation by regulator the SEC over its accounting practices and balance sheet reporting. Its fall prompted passage of stricter new accounting measures in the Sarbanes-Oxley Act of 2002.
Enron was formed in 1985 following the merger of Houston Natural Gas and InterNorth and later became a major player in the energy-based commodities market. The company's share price rose steadily over the next 10 years as it expanded beyond its original specialty of energy trading into other commodities. It quadrupled from 1997 through 2000 to $98 per share as its reported revenue skyrocketed.
The SEC began investigating Enron's finances and its accounting firm, Arthur Andersen, in October 2001 after the company reported a quarterly loss of $638 million and a $1.2 billion writedown in shareholder value. One month later Enron revised its financial statements for the previous five years, wiping out some $591 million from reported net income. Enron officials admitted to the SEC that the company covered up losses by transferring them to so-called "special purpose entities" off its balance sheet that were actually controlled by Chief Financial Officer Andrew Fastow.
Fastow was one of 18 former Enron employees who pled guilty out of a total of 34 defendants accused of criminal conduct in the years following Enron's collapse. The company's fall and revelations that Arthur Andersen did not probe Enron's suspicious off-balance-sheet financial reporting led directly to Federal Congress passing the Sarbanes-Oxley Act of 2002, which among other things created a controversial public company accounting board. The Sarbanes-Oxley Act, also known as SOX, defines which of a company's financial records and electronic-based information must be retained by a listed company and its accounting firm, and for how long.
The Enron scandal was popularized in the critically acclaimed book and film "Enron: The Smartest Guys in the Room", which revealed the company to be a sophisticated Ponzi scheme (pyramid scheme) because it enriched early investors at the expense of later ones. The original book was co-authored by Fortune magazine reporters Bethany McLean and Peter Elkind.
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- McLean, Bethany and Elkind, Peter (2003) "Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron", Portfolio Hardcover. ISBN 978-1591840084