Reading the records
Enron: what moving a loss can hide
A specific transaction in the appellate record explains the gap between a business's performance and the picture presented to outsiders.
The division that appeared to improve
Enron's accounting can seem too complicated to explain without explaining the whole company. One passage in the appellate record offers a narrower starting point: losses were shifted from its retail energy division to its wholesale division, making the retail business appear more profitable than it was.
In its April 6, 2011, opinion, the Fifth Circuit described trial evidence about Enron Energy Services. The division should have recognized substantial losses in the first quarter of 2001 under the accounting rules it said it followed. Problems included bad debts, errors in valuing contracts, and expenses it could not pass to customers. Moving the losses helped conceal those problems from the picture presented to investors.
The meaning of a reported result
The explanatory point is straightforward even when the entries are technical. A reader assessing a division wants to know what that business earns and what it costs to operate. If losses are assigned elsewhere without a truthful explanation, an apparently improving result can answer a different question from the one the reader thinks was asked.
That is why the case cannot be reduced to a dislike of complicated accounting. The relevant questions concern the accuracy of the reported picture and what people were told about it. The Justice Department described the broader scheme as creating a false impression of predictable growth, successful businesses, manageable debt, and adequate cash flow. Enron filed for bankruptcy in December 2001.
Follow each legal outcome to its conclusion
Jeffrey K. Skilling's case continued after his 2006 jury conviction. The Supreme Court invalidated the honest-services theory used in the conspiracy instruction. On remand, the Fifth Circuit found the error harmless and affirmed his convictions while again requiring resentencing. On June 21, 2013, Skilling received a 168-month sentence.
Kenneth L. Lay's outcome was different. After he died before sentencing, the district court vacated his conviction and dismissed the indictment on October 17, 2006. Describing both men simply as convicted executives would erase that distinction. The Texas Fraud Files follows both the financial representations and the subsequent records, because explaining how a business misled people does not remove the obligation to state precisely what the courts ultimately did.
Sources and further reading
- United States v. Skilling, No. 06-20885, opinion on remand (April 6, 2011)
U.S. Court of Appeals for the Fifth Circuit - Former Enron CEO Jeffrey Skilling Resentenced to 168 Months (June 21, 2013)
U.S. Department of Justice - United States v. Kenneth L. Lay: vacated conviction and dismissed indictment
U.S. Department of Justice
This article is a companion to the series. Send a correction or a later development.