Reexamining Enron's Regulatory Consequences

The downfall of Enron Corporation often epitomizes corporate fraud. One of the world’s fastest growing and most inventive companies, Enron had engaged in a range of complex structured hedging transactions designed to achieve accounting rather than operating results. Its principal motivation, though, was to avoid the risk of incurring financial-statement losses that could impair its credit rating and thereby destroy its primary business of derivatives-based energy trading.Enron’s management has been criticized for engaging in these structured hedging transactions, and some of its managers were sent to jail. This symposium article concerning “Business and Financial Crimes” attempts to set forth the facts objectively. It observes, among other things, that in engaging in the structured hedging transactions, Enron’s managers complied with reasonable corporate processes, had the help of outside counsel, obtained independent fairness opinions, and received at least cautious approval from the big-five accounting firm that acted as external auditor. The article ultimately asks, “If you were advising Enron, what would you have recommended the managers should do?” The article suggests that Enron’s collapse and the resulting congressional response illustrate how society can overreact to dramatic business failures and how regulatory responses can sometimes miss the mark. It contends that corporate managers often must—as Enron’s managers did—take risks that, ex ante, are viewed as reasonable to enable their firms to remain competitive in a global economy. That makes it inevitable that some firms will fail. Failure, therefore, should not automatically be judged as managerial misfeasance