The Next Accounting Fiasco
Bloomberg Businessweek|December 06, 2021
Twenty years after Enron’s failure, investors are still vulnerable to corporate numbers games
By Greg Farrell

The collapse of Enron, which filed for bankruptcy protection on Dec. 2, 2001, shook the capital markets and led directly to the demise of Arthur Andersen, the auditing firm that approved Enron’s annual statements and accounting acrobatics. The scandals led to new rules and laws for corporations and auditors that were meant to prevent future frauds of such massive scale.

Two decades later, no similar blowups have occurred in U.S. markets. But it’s not clear that investors are any safer today than they were before Enron Corp. failed.

At the time of the Enron fiasco, Andersen had already been enmeshed in frauds at Waste Management Inc., Sunbeam Products Inc., and the Baptist Foundation of Arizona. Soon an even bigger fraud would emerge at WorldCom, another Andersen client. In the wake of the Waste Management collapse, the U.S. Securities and Exchange Commission hit Andersen with a $7 million fine, sanctioned four partners, and issued an injunction against any further violations of securities laws.

Once the Enron fraud began to emerge, Andersen’s Houston office quickly activated its “document retention policy,” shredding Enron work papers in advance of an SEC inquiry. As public outrage grew, the Justice Department charged the firm with obstruction. In settlement talks, prosecutors insisted that Andersen admit to some form of wrongdoing. Andersen’s management refused, maintaining that the firm had not broken any laws. A Houston jury convicted Andersen in 2002, effectively putting it out of business.

The Andersen prosecution rattled the other firms in an industry that had morphed from watchdogs to enablers of fast and loose accounting practices. The 2002 Sarbanes-Oxley Act, a wide-ranging law to strengthen auditors’ oversight, added to the pressure on corporations to avoid reporting dodgy numbers. For a few years, the specter of Andersen’s fate injected a rigor into its peers’ audits that had previously been absent. Earnings restatements rose in 2003, 2004, and 2005, a sign that the act’s accounting reforms, coupled with emboldened auditors, were curing corporations of bad practices.

Continue reading your story on the app

Continue reading your story in the magazine

MORE STORIES FROM BLOOMBERG BUSINESSWEEKView All

The Fed's Mind Control

The idea that monetary policy shapes inflation expectations is about to get road-tested

5 mins read
Bloomberg Businessweek
January 24, 2022

Sheltered Paradise

With spectacular beaches, top-tier resorts, and a stellar Covid record, Anguilla is growing even more irresistible.

6 mins read
Bloomberg Businessweek
January 24, 2022

Same City - Different Games

What’s changed since Beijing last held the Olympics? Almost everything

4 mins read
Bloomberg Businessweek
January 24, 2022

Keeping Covid Out of The Cabin

As the pandemic enters Year 3, airlines are stepping up their hygiene routines

4 mins read
Bloomberg Businessweek
January 24, 2022

Boxed In on China

Biden’s inability to extract concessions from Beijing is a liability going into November’s midterms

5 mins read
Bloomberg Businessweek
January 24, 2022

Revisit Your Retirement Strategy

High valuations, rising interest rates, and spiking inflation make it time for a checkup

6 mins read
Bloomberg Businessweek
January 24, 2022

Ponzi schemer On the Pacific

Gina Champion-Cain was a beloved friend, mentor, and pillar of the San Diego business community. But her successful image and lavish lifestyle were fueled by a $400 million fraud

10+ mins read
Bloomberg Businessweek
January 24, 2022

How Did Blake Hall Get Between You And Your Identity?

During the pandemic his online-authentication company, ID.me, became the government’s digital gatekeeper. And its grip is only getting tighter

10+ mins read
Bloomberg Businessweek
January 24, 2022

Biden's Year 2 Test

As the pandemic wears on and prices rise, many Americans are disillusioned with the president. Can he win them back?

10+ mins read
Bloomberg Businessweek
January 24, 2022

A FIGHT OVER DISCRIMINATION IN THE AGE OF ALGORITHMS

Redfin has staked its reputation on making a racist industry more equitable. Critics say it’s been denying services to Black homebuyers and sellers

10+ mins read
Bloomberg Businessweek
January 24, 2022