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Chapter 5
broker—trading electricity and other commodities. As a broker, Enron entered into
separate contracts with sellers and buyers of energy, making money on the difference
between the selling price and the buying price. Because Enron kept its books private, it
was the only party that knew both prices. Enron’s business evolved over time, extending
to practices that allowed customers to insure themselves against a range of risk factors,
including changes in interest rates, weather, and a customer’s inability to pay. The
volume of these financial contracts eventually became far greater than the volume of
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contracts to actually deliver commodities.
To manage the risk in these contracts, Enron employed a team of people with Ph.D.s
in mathematics, physics, and economics. Risk management balances the opportunities
offered by a business against the risks inherent in taking that business. As Enron’s
business became more complex and its stock soared, the company created partnerships
between Enron and companies involved in Internet broadband technologies, computer
technology, and energy, to name a few. While some of the partnerships were set up
legitimately, others were created for the sole purpose of masking billions of dollars in
debt, allowing Enron managers to shift debt off the books.
The partnerships that Fastow engineered were the subject of discussion long before
Enron’s bankruptcy. In a June 1, 1999, article in CFO magazine, Ronald Fink noted that
the Financial Accounting Standards Board was looking at rule changes that would affect
companies using creative financing techniques, such as those used by Enron. Enron
owned a number of subsidiaries, but it made sure that it owned no more than 50 percent
of the voting stock, which allowed it to keep the debt and assets of these subsidiaries off
Enron’s own books. If Enron had not used these creative accounting practices, the
company would have had to report a much higher percentage of debt, which would have
increased the costs that Enron paid to borrow money.
For years, Enron’s financial statements had been audited by Arthur Andersen, a
highly regarded accounting firm. As Enron’s auditor, Andersen issued annual reports
attesting to the validity of Enron’s financial statements; it was supposed to function as an
unbiased, incorruptible observer and reporter. Enron’s October 16, 2001, press release
characterized numerous charges against income for the third quarter as “nonrecurring,”
even though Andersen had determined that Enron did not have a basis for concluding that
the charges would in fact be nonrecurring. Andersen advised Enron against using that
term and documented its objections internally in the event of litigation, but the firm did
not report its objections or take any other steps to correct the public statement. On
March 7, 2002, Arthur Andersen was charged with obstruction of justice.
Perhaps the most damning part of Andersen’s obstruction of justice indictment related
to the destruction of documents. On October 23, 2001, the day after Enron publicly
acknowledged the SEC inquiry, Andersen personnel in Houston were called to mandatory
meetings where they were instructed by Andersen partners and others to immediately
destroy documentation relating to Enron; Andersen employees were told they should work
overtime if necessary to accomplish the destruction. Over the next few weeks, employees in
several Andersen offices worldwide undertook a concerted initiative to shred tons of paper
documentation and to delete hundreds of computer files relating to Enron.
Outcome of the Enron Scandal
The effects of the Enron scandal were felt both within and well beyond the company.
Many of Enron’s shareholders were Enron employees who invested their 401K accounts in

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