Report of Investigation by the Special Investigative Committee of the Board of Directors of Enron Corp.
by William C. Powers Jr., Raymond S. Troubh, and Herbert S. Winokur Jr.
Widely promoted as one of the great corporations of a new age, the Enron company has turned out to be largely, and perhaps even mostly, a creation of accounting gimmickry. But the scandal of its collapse is not an isolated example of a single company run amok. The most serious of Enron’s activities could not have been undertaken without the approval, encouragement, and at times complicity of many of the most prestigious independent accountants, lawyers, commercial and investment bankers, security analysts, and debt-rating agencies in the nation. They also could not have been carried out without an unusually lax attitude in Washington and elsewhere toward even the most basic securities regulations and disclosure requirements. More than any other recent event, Enron’s collapse has made it apparent that there is something deeply wrong with the way public companies operate in America’s financial markets, and with the way information is manipulated with little respect for the interests of clients or customers and for the spirit of the law, not to mention elementary standards of honesty.
This is hardly a foundation on which a strong economy can be built. Systematically misleading information encourages tens of billions in wasted investments; it also promotes and sustains inefficient companies, and even entire industries, and creates market speculation that can ultimately lead to widely damaging financial crashes, taking the innocent down along with the guilty.
Enron was formed in a merger fifteen years ago between two old-line natural gas pipeline companies, Houston Natural Gas and Internorth. But it had no intention of doing business as usual; nor should it necessarily have done so. Run by a soft-spoken economist, Kenneth Lay, it seized on the spreading deregulation of electricity and natural gas prices to transform itself into an entrepreneurial trader of energy, mostly electricity and natural gas, throughout the US and in many places around the world. In particular, it made inventive use of specialized financial instruments known as derivatives, which enabled it to hedge investments. If a company wanted to guarantee the price it would pay for electricity in 2004, Enron could write a contract with the company to provide electricity at that price. Enron could in turn hedge the guarantee by making a derivatives contract with another investor who would promise to sell electricity to Enron in 2004 at the same agreed-upon price. It eventually traded instruments like these based on everything from the value of fiber-optic cable capacity and newsprint to the weather.
In the eyes of Wall Street and the business press, Enron was a classic “new economy” company. It developed sophisticated financial trading technology, which impressed observers, and made intensive use of the Internet. Many of its ideas were sound and far-seeing. If derivatives in energy were traded legitimately, for example, it could help businesses and private energy users to reduce future uncertainties by enabling them to lock in costs—even costs that would arise ten years later. The use of the Internet to trade derivatives could result in generally …