In 2001, Enron was the one to watch. You couldn’t go five minutes without hearing about Enron. You’d visit your grandmother in her home and she’d be on about Enron again. It was inescapable and indestructible, a behemoth stalking the stock market. But then, all of a sudden, it wasn’t there anymore. Almost overnight, Enron collapsed, and with it came tumbling down careers, retirement funds, and one of the largest accounting firms on the planet. Not to mention your grandmother’s brief foray as a financial analyst.
As of writing, Enron remains a defining moment in accounting history. It was the watershed moment the industry had been dreading. If you’ve ever had to write "internal controls” for the billionth time in a report and stopped to wonder why, well, Enron is your reason.
🧨 What actually happened?
Put very simply, Enron lied. It told big porkies on the playground, and the market was happy to take its word. Using complex financial structures called special purpose entities, or SPEs, Enron shifted debt off their books and inflated earnings. It’s a pretty neat trick, but we wouldn’t advise on using it, because of the whole Enron thing.
They also used mark-to-market accounting to book projected future profits as current ones. Combine that with a high-octane trading business, secretive internal deals, and some loose ethics, and you get a disaster waiting to happen.
And happen it did! Enron’s share price fell from over $90 to under $1, and Arthur Andersen – its auditor and part of the Big Five – ceased to exist shortly after. Oops.
🕳️ The fallout
Even with the most meticulous combing through of accounts, you still have to assume that the numbers are based on something real. In Enron’s case, they were so far removed from the realities of the business, so extrapolated from the actual inventory, that they may as well have just made them up on the spot.
So, when the stuff that hits the fan hit the fan, it became pretty obvious that something needed to change.
🧾 Getting their act together
Luckily, the US government leapt into action, and brought forward the Sarbanes-Oxley Act of 2002, also known as SOX. This was the legislative equivalent of your mum walking in, turning off the Xbox – or, depending on your age, the SNES, Pong, or hoop and stick – and saying, "right, that’s enough.”
SOX introduced sweeping changes:
- CEOs and CFOs had to personally sign off on financial reports.
- Internal controls had to be documented and tested.
- The Public Company Accounting Oversight Board (PCAOB) was created to watch the watchdogs.
In the UK, the response came through a series of critical reforms rather than a single act. The Higgs Review (2003) scrutinised the role of non-executive directors, while the Smith Report tightened the rules around audit committees. Both informed updates to the UK Corporate Governance Code, which reinforced a commitment to board independence, transparency, and accountability.
Globally, other countries also followed suit with their own versions of governance reform:
- Canada introduced C-SOX.
- Germany released the German Corporate Governance Code.
- France passed the Financial Security Law.
- South Africa issued the King II Report.
- The Netherlands adopted the Tabaksblat Code.
- Australia enacted the Corporate Law Economic Reform Program Act.
- India, Italy, Japan (J-SOX) and Turkey (TC-SOX) all introduced significant regulatory changes between 2003–2015.
These reforms may vary in style and scope, but they share a common lesson – trust in financial reporting must be protected and enforced. Enron falling sent a shockwave across the world – it was sort of like the comet that killed the dinosaurs, except less dinosaurs were killed because of it.
💬 Why are we talking about it?
We’re talking about Enron collapsing because it was big and important! One of the biggest accountancy firms in the world was wiped out along with it, like how that comet killed the dinosaurs. But unlike that comet, this fallout led to a complete restructuring of corporate governance.
Before Enron, "internal controls” were a bit of an afterthought. But now they’re a heavily regulated element of an accountant’s work. And auditors can no longer pal around with their auditees – they have to make friends elsewhere, which is slightly sad when you think about it.
🧠 Final thoughts
Enron is the cautionary tale about bad accounting. It’s a story about hubris, ambition, and what happens when nobody asks the obvious questions. And the story ended with a big change to the working landscape, with accountants carrying more responsibility than ever before.
So, if you've ever cursed the existence of audit trails, thank Enron. It made accountants more accountable. In fact, in many ways, it made us accountableants.
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