Enron and the Special Purpose Entity. Use or Abuse? The Real Problem - The Real Focus


In December of 2001, Enron Corporation filed for bankruptcy under Chapter 11 of the U.S. Bankruptcy Code; one of the largest corporate bankruptcy filings at that time. When the investigations commenced and the tangled Enron web was unraveled, it was discovered that Enron had perpetrated a very sophisticated form of accounting fraud through its repeated use of what are referred to as Special Purpose Entities (“SPEs”). In their most basic forms, SPEs are business entities formed for the purpose of conducting a well specified activity such as construction of a gas pipeline, or collection of a specific group of accounts receivable. However, because of their complex nature, SPEs can be used to manipulate a corporation’s financial results, which was the primary use for which Enron employed the SPE structure.

As a result, the investment and financial community has cast a dark cloud over the special purpose entity, depicting the SPE as an inherently evil structure whose only purpose is to defraud, obfuscate and manipulate a company’s financial results. The purpose of this piece is to challenge this assumption and conclusion as incorrect. This article shows how the SPE abuse Enron perpetrated was neither an indictment of the SPE or the accounting regime under which Enron was operating, but of individuals who intentionally ran afoul of the accounting and disclosure rules that were in existence at the time.

The article shows how the problem with Enron did not lie with any SPE accounting “loopholes”, but with Enron intentionally violating both the letter and the spirit of generally accepted accounting principles as they related to SPEs. The article then looks at the accounting reforms enacted in response to Enron’s practices and attempts to show how those reforms miss the mark, as they are incorrectly focused on SPE use rather than SPE abuse. Finally, the article proposes some alternative approaches that are aimed at focusing more narrowly on the actual problem of SPE abuse. It has been a challenging endeavor, as little has been written on this specific area due to its complexity. But its complexity is what has piqued my curiosity and interest.


Accounting Law | Banking and Finance Law | Business Organizations Law | Securities Law

Date of this Version

March 2006