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How the Enron scandal lost investors billions and led to executives going to jail

By Hugh Fort in US business news, posted December 28, 2023

The Enron scandal remains one of the biggest and most controversial accounting frauds in US history and led to highly-paid and powerful executives going to prison.

The corporation was an energy and commodities provider based in Texas, which grew rapidly after its formation in 1985.

Jerry Skilling was hired as CEO in 1990.

Under his leadership a group of executives started using accounting loopholes and poor financial reporting to hide billions of dollars of debt caused by failed deals and projects.

His chief financial officer Andrew Fastow and other executives misled Enron's board of directors and audit committee on their high-risk accounting practices, which were being hidden by apparent huge increases in profits.

The accounting firm Arthur Andersen was also pressurized to ignore the financial issues.

What was the scandal?

The scandal unravelled in 2001.

The company had been hiding billions of bad debt while simultaneously inflating its earnings.

Shareholders lost an astonishing $74 billion as a result and the company's shares fell from around $90 to under $1 in just a year.

Skillings and the former CEO Ken Lay were found to have kept the massive debts off the company's balance sheet.

Who went to prison?

Lay and Skillings were found guilty, but Lay died after suffering a heart attack before he could spend any time in prison.

Skillings was jailed for 24 years in 2006.

His sentence was reduced by 10 years in 2013 after making a deal with the Securities and Exchange Commission.

He was released from prison in 2019.

A number of other Enron executives, including Fastow and his wife, were also jailed.

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What happened afterwards?

The scandal led to Enron going bankrupt and Arthur Andersen being dissolved.

Enron's $63.4 billion in assets made it the largest corporate bankruptcy in U.S history, until it was surpassed by the collapse of Worldcom a year later.

The scandal led to a series of new regulations and legislation being introduced to expand the accuracy of financial reporting for public companies.

It led to the Sarbanes-Oxley Act, which increased the penalties for destroying, altering, or fabricating records in federal investigations or for attempting to defraud shareholders

The act also increased the accountability of auditing firms to remain unbiased and independent of their clients.

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